Pensions bill set to outstrip GDP

For the first time ever, the projected cost of the UK's private pensions is set to be higher than our gross domestic product (GDP).

While only a tiny number of companies now offer defined benefit schemes to new staff, many long-term workers at companies such as BT, Lloyds Banking Group and Royal Mail are still enjoying the benefits.

And with 11 million people on defined benefit schemes, the total amount promised has rocketed from £1.7 trillion last year to £2.1 trillion - more than the UK's entire annual output of £1.8 trillion.

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If public sector schemes and the state pension are included, the liability becomes many trillions more.

"For the first time in living memory, the liabilities of UK private sector DB pension schemes are now bigger than the UK economy," says Calum Cooper, partner at Hymans Robertson, which compiled the figures.

"This has been driven by ultra-low interest rates, pushing up liabilities much faster than the modest rates of growth we've seen in UK GDP."

The reason is ultra-low long term interest rates, stimulated by the likes of the EU quantitative easing programme, which has pushed up liabilities much faster than the economy has grown.

Pension scheme asset bases are at their highest ever levels, having grown by over 40% to around £1.3 trillion today. But time is running out for these assets to deliver the returns needed to meet the mountain of pension payments that lie ahead, says the firm.

"It's important to make sure that cash is easily available when it's needed - without a fire sale - to pay the pensions promised," says Cooper.

Mature schemes are increasingly paying out far more in benefits than they receive in contributions - a problem that's only set to get worse now that the new pension freedoms have been introduced.

Indeed, Hymans Robertson says it expects as much as £10 billion to be switched from defined benefit schemes to defined contribution schemes per year.

"Fortunately there is a clear opportunity right now for schemes, especially small and medium sized ones, to complete bulk annuity deals at highly competitive prices. This is because the life assurance sector has been hit hard by George Osborne's 'freedom and choice' in pensions, which has caused sales of individual annuities to collapse," says Cooper.

"Insurers are looking to offset this lost income by entering the corporate pensions market. The conditions are good, but pension schemes will need to move quickly to take advantage of this short window of opportunity."

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