Company pensions bill is greater than GDP at £2trn

The future cost of paying pensions promised to 11 million people in defined benefit schemes has rocketed in the space of a year from £1.7 trillion to £2.1 trillion, compared with a national annual output of £1.8 trillion.

The Times reports that Hymans Robertson, the consultancy that calculated the figures, said that a collapse in government bond yields had pushed up liabilities far faster than the economy.

Private sector liabilities have never before been greater than GDP. The development will present big problems for some companies, according to Mark Wood, former head of Prudential in the UK. “This ultimately will compromise their ability to pay dividends,” he said. “Also, pensions liabilities can no longer be ignored when valuing companies.”

John Ralfe, an independent consultant, said the figures showed that the “level of overall debt . . . is higher than most people appreciate”. It is less risky for the pension schemes of large companies, which are unlikely to go bust, but for smaller companies “this is an extra problem”.

Calum Cooper, a partner at Hymans Robertson, said: “The scale of the risk has never been greater relative to the size of the economy underwriting it.”

While asset values have been rising strongly in the past five years, they have not been strong enough to narrow the aggregate deficit, which stands at around £800 billion, according to Hymans’ research.

Longer life has added to the pressure on employers that sponsor “final-salary” schemes, where pensions are guaranteed regardless of investment performance.

The biggest impact, however, has been from the slide in government bond yields, which are used to value liabilities. Yields have fallen from 3 per cent to 3.5 per cent to 2 per cent to 2.5 per cent in the past year.

The decision by the European Central Bank to embark on a €1.1 trillion money-creation and bond-buying stimulus led to another slide, although there has been a partial recovery in the past few weeks.

Yields, which are a proxy for risk-free returns, are used to discount future pension promises back to the present day.

Employers have paid £44 billion in contributions in the past three years in an attempt to narrow their yawning deficits, but to little avail. “Time is running out for assets to deliver the returns needed to meet the mountain of pension payments that lie ahead,” Hymans warned.

While almost all private employers have long since closed their defined benefit schemes to new recruits, they have often allowed existing long-serving staff to carry on accruing benefits. About two million private sector employees are still doing so in companies including BT, Lloyds Banking Group and Royal Mail.

The total pensions liability for Britain is many trillions more if the liability of public sector pension schemes and the state pension is included.