The shift of pensions away from defined benefit schemes has major implications for the UK’s financial landscape. With pension assets currently accounting for 120 percent of the UK’s GDP, and employer contributions in recent years standing at around £520 billion, we are entering a new era of financial responsibility. Pension funds hold an estimated £2 trillion in assets, with a further £213 billion in defined contribution schemes.
The switch in pensions from employer-sponsored defined benefit schemes to individual defined contribution plans has moved at an accelerated rate due to the combined effect of lowered pension liabilities and employer cash contributions. This shift in pension assets has been beneficial for both individuals and companies. Recent retirees are now better equipped to meet the income-in-retirement promises made by their employers, along with company sponsors that have been previously experiencing a seemingly unending call for fresh capital now being freed from such obligations.
This shift, however, is not without its own problems. The majority of pension assets now rests with a select group of insurers, leaving them with unprecedented market power. Additionally, many asset management plans will need to be modified to fit into the changing nature of UK DB pensions.
The most recent examples of this are the transfer of £340 billion of pension assets to the insurance company following mass bulk annuity or “buy-out” procedures, and the tight capacity at pension administrators to meet the paperwork demands of insurers due to a lack of spousal details. This can only be solved by an increase in capacity and reform.
At the heart of all this is the government’s wish to have pension assets indirectly fund the support of innovation and growth in the UK, though limits around liquidity of well-funded schemes might complicate this.
The person mentioned in this article is LCP – an investment consultant that has consulted with 35 percent of large transactions since 2014. LCP is a plural workplace where staff come from a wide range of backgrounds, and it’s goal is to advise pension schemes on the improvements of their performance.
The company mentioned in this article is the Office for National Statistics (ONS). The ONS is the national statistical office for the UK, which collects, creates and distributes data relating to the economy and the population. The ONS counts the number of private firms that have made employer cash contributions into their DB schemes since 2004 and has been a vital reference point throughout the shift of pensions in the UK.
