The cost of DB pensions for the UK’s largest 350 listed companies has increased by over £2bn since the start of 2016, Mercer has reported.

Mercer’s Pensions Risk Survey has shown that the rising costs of final salary pension schemes have been driven by record lows in high-quality corporate bond yields which are used to measure pension costs in company accounts.

Falling bond yields reflects investors’ outlook for economic and productivity growth which will eventually impact the changes in central bank interest rates and their long-term level. The low yields have also been attributed to the Bank of England’s expansion of quantitative easing and the aftermath of the EU referendum.

The survey also highlighted that DB pensions now equate to around 40 per cent of employee pay in comparison to less than 10 per cent for DC schemes.

Mercer UK head of pension accounting Warren Singer said: “Our analysis of current low bond yields shows that new DB pension savings now typically have an accounting cost about four times higher than the cost of defined contribution (DC) retirement savings. The impact of over £2bn on profits is material compared with pre-tax profits of FTSE 350 companies of £84bn in 2015.

“Brexit has introduced considerable uncertainty on how profit will be impacted by DB pension plans after 2017. To help companies understand this, we have developed some scenarios to illustrate a range of possible Brexit outcomes and how they would affect pension costs over the medium term.

“However, if employers believe in a low growth world, they may find it unsustainable to allow employees to continue building up new DB pension savings.”

Mercer Retirement business head of DB risk and partner Alan Baker, added: “Whatever your long term view of bond yields, many employers will want to stop the current bleeding caused by spiralling DB pension costs and for schemes that are still open to contributions this may well involve closing the scheme and moving to less expensive DC saving plans, yet DC plans are not immune, as the same economic conditions could cut the benefits paid out, causing problems for both employees and employers.”

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