Despite a massive recovery in stock markets last year, the cost of annuities has grown even faster, leaving the UK's pension system with a deficit of about £330bn on a non-profit annuity buy-out basis, says consultant Mercer.
That is £10bn more than the gap recorded in March last year, when equities hit their lowest levels, Mercer says, defining the gap as the difference between full benefits promised to members of occupational schemes and the value of scheme assets.
Longer life expectancy combined with falling competition in the life insurance sector mean the annuity rate increases have cancelled out any gains made by the market, the consultant says.
The £330bn deficit compares to the estimated total value of pension scheme assets of £570bn and the total market value of listed companies of about £1.3trn.
The problem is being compounded by rules introduced last year, forcing solvent employers that wind up schemes to meet annuity costs in full. That is causing employers to put off winding up schemes, Mercer says, however this merely postpones the cost into the future.
If pensions costs are not to start acting as a drag on the total economy, the government should consider cutting levels of guaranteed benefits or reduce the level of benefit security. Mercer suggests this be done by increasing the retirement age or ending index linking of pension increases.IFAonline
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