A recent report from consulting firm Lane Clark & Peacock paints a chastening picture of the task faced by those managing assets for defined benefit pensions in the UK. The report talks of a system which is close to a "tipping point". With proposed accounting rule changes which may widen the funding gap for many schemes just around the corner, and despite achieving a highly respectable return of around 6% pa over ten years, the task ahead for portfolio managers seems harder than ever.

Some of the numbers quoted in LCP's annual 'Accounting for Pensions Survey' are eye-watering: Despite injecting over £150bn in contributions into the system over the past ten years, FTSE 100 companies with DB schemes have presided over an overall increase in accounting deficits during that period of near £30bn. This despite extensive liability sided corrective action such as pay deferrals, accrual reductions and closures to further accruals, increasing retirement ages and removing key personnel from scheme membership. Despite employer contributions reaching record levels in 2016 of c.£17bn, liabilities now stand at £625bn - 85% higher than they were ten years ago, largely due to falling corporate bond yields, against which liabilities are discounted over the life of a scheme. 

Neither should we assume that these figures represent a problem for tomorrow:  BAE Systems' DB liabilities at the end of 2016 amounted to 170% of the company's market value and the same metric applied to British Airways/IAG (albeit the fund itself has a much smaller funding gap) is 268%, thereby posing real risks to UK corporate life...