Defined benefit pension schemes must invest in growth in order to cut their deficits, according to the Institute of Chartered Accountants of Scotland (ICAS) president, Sir Brian Souter.

Calling for more national debate on the issue, Souter believes that DB assets are not being invested “in ways that encourage enterprise and employment”.

Figures from the Pension Protection Fund (PPF) show that over the last ten years, pension schemes have been increasing their investments into government gilts instead of equities and corporate bonds, and over that time expected return of government gilts has plummeted.
Souter said: “You might expect our pension schemes to be investing heavily in businesses and growth for the future, but they’re not.

“We have record levels of investment into pension schemes, and we have amongst the best funded pension arrangements in Europe, so why do we have an apparently ever-growing pensions black hole?”

When deciding how to fund their pension liabilities, DB pension schemes have to take into account The Pensions Regulator (TPR), causing many pension schemes to take a cautious approach to investing, according to ICAS.

Writing in the December issue of ICAS’s CA magazine, Souter said current DB pension schemes, as influenced by TPR, target long-term future investment returns of 2.4 per cent per annum, achieving an aggregate deficit of £400bn to £500bn, but argued that the pension schemes themselves expect returns of 4.3 per cent, which would generate a £270bn surplus.

He added: “But by reversing the recent trends towards gilts and bonds, we can break the current cycle of unaffordable funding and provide the same level of security for future generations that today’s pensioners enjoy.”

Souter said he would like to see more of the £2tn of funded pension scheme assets being put to work across the generations.

The UK’s DB deficit increased by £40bn to £450bn at the end of November, according to new figures released by PwC’s Skyval Index.

The index, which provides an aggregate health check of the UK’s 5,800-odd DB funds, showed that the total assets held by DB schemes is £1,560bn, while their combined liability target was £2,010bn.

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