Filling the defined-benefit pension shortfall – before it’s too late

David Rae, Head of Client Strategy & Research, EMEA

Paul Wharton, Head of UK Fiduciary Management Clients 


Defined benefit pension plans have been around for many years, if not decades. While equity values have been caught amid a bull-run since the financial crisis, the rising value placed on pension scheme liabilities has increased pension scheme deficits over recent years, which has focussed the attention of FDs and CFOs on the issues. In addition, the increasing life expectancy of the pension scheme members has compounded the problem. Indeed, as pension schemes have matured, many have ceased accrual of further benefits. These schemes are often no longer a benefit that the existing workforce has access to - they are a legacy issue.

The precise nature of the pension scheme problem is evolving. Historically, the focus has been on trying to close the deficit (and improve the funding ratio) through a combination of contributions and investment returns. However, the gradual maturing of pension schemes means that in the UK they are now, on average, "cashflow negative", that is they are paying out more benefits on a monthly basis than they are receiving in contributions. This development brings its own set of challenges. The first is that generating cash to pay pensions – the primary purpose for such a scheme – needs to be prioritised. Ensuring that there is sufficient money to pay all the pensions over the life of the scheme remains an important objective, but this will become increasingly challenging as the pool of assets available to generate returns diminishes in size.

It is not too late to address these issues, but action needs to be taken sooner rather than later.

Russell Investments has been advising clients on appropriate solutions to overcome their specific issues for many years. Furthermore, we have considerable experience in directly implementing the agreed solutions, which enables our clients to focus their time and energy on strategic decision-making.


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