Evercore Pan-Asset have researched the problems facing employer-funded pension plans in the UK. We are well aware of the pressures on these funds, with actuaries and other advisers urging companies to commit more to the annual payments into the funds to make up for the apparent deficits. The scale of the deficit depends on a range of interconnected variables. The deficit will rise if inflation increases, making it dearer to pay future pensions. It will go up if the underlying investment performance is poor. It rises when actuaries decide that the members of the scheme are likely to live longer, in line with the improving age expectancy of the population at large. It will even go up when interest rates fall, as actuaries use the long bond rate of interest to calculate how much money you need to buy future annuities when people retire, and you need more in an era of low interest rates.
We appreciate that companies and Trustees want two kinds of assurance. They need to know that the assets of their fund are being well invested, so that investment policy is contributing to paying future pensions, not making the task more difficult. They also wish to know that the combination of company cash flows into the pension fund and investment gains and income are realistic so that the pensions are payable in the future and the company can afford its contributions.