Pension deficits aren't real - here's how to fix them

Pension deficits threaten the survival of otherwise healthy companies, damage productivity and hold down wages. But there’s a much simpler solution than just throwing money at the problem, says Merryn Somerset Webb.


Throwing cash at pension deficits is money down the drain
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One of the biggest worries in the West has long been pension deficits. How we ask, over and over, will we ever manage when our defined-benefit pension funds are £530bn in deficit?

The consensus answer is that we will manage by forcing companies the sponsors of these schemes to pay huge amounts of money into the funds in a seemingly endless attempt to cut the deficits to reasonable-looking levels.

Doing so might put the survival of some firms at risk; it might mean a fall off in capital investment and productivity; and it might even be one of the factors holding down wages in the UK (the pension fund takes priority over the workers). But there it is. The pension beast must be fed.

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At MoneyWeek we have often wondered if there isn't an easier answer. Why not just change the inputs to the deficit calculation? Most funds calculate their deficits with reference to the UK's historically low gilt yields or AA rated corporate bonds (ie, they assume that their long-term returns will be minute).

But they could just as easily use the expected return on a well diversified portfolio of assets. This would be higher, the expected long term value of the fund would then be higher and the deficit lower. How easy is that?

There is another number pension trustees could change that would do them just as well the longevity numbers. The latest life expectancy analysis from the Continuous Mortality Investigation (CMI) shows that we are no longer seeing the same rates of improvement in life expectancy as we did at the turn of the 21st century. Yet most pension deficit calculations assume that we will keep living longer and longer.

Correct this to account for current trends*, says PwC, and some £310bn could be "wiped off" the current £530bn aggregate pension deficit, leaving a mere £220bn. Then add 1% a year to return assumptions (which is really not remotely punchy) and you will have dealt with the rest "without needing company cash contributions".

To non-accountants this all sounds ludicrous. But it isn't. Pension deficits aren't real they are just functions of trustee assumptions about far-off futures. Those assumptions can and should be challenged fantasy deficits matter to individual company sponsors, but given the possible effects of diverting cash from productive use to pension-deficit-plugging use, they matter to the rest of us too.

* Assume men will live to 84 rather than 90 and women will live to 86 rather than 91.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.