UK – Pension surpluses could be the next ‘pension scandal’, according to Aon’s investment consulting head Ian McKinlay.
Speaking at a pension fund strategies conference in London today, McKinlay told delegates that companies are being forced to plough money into pension funds at a time when interest rates are low and liabilities are inflated.
“With a more prudent funding regime now in place, the risk of creating future surplus is now very real,” the firm says in its ‘Intouch Opinion’ newsletter.
Because pension funds are “ring-fenced”, surpluses are trapped, McKinlay told IPE on the sidelines of the conference.
Meanwhile, the surplus cash put in by employers could have been better used to invest in the business. “I think surpluses are the next big pension scandal,” McKinlay said.
Aon estimates that a typical scheme has a 60% chance of being in surplus within 10 years, and a 25% chance of being more than 120% funded.
“The ‘surplus funds’ scenario is clearly in the interests of the members, so no reasonable trustee is going to consider how to avoid it,” said Aon.
“It is therefore up to employers to look at the issue.”
McKinlay told IPE that while the Pensions Regulator would probably welcome surpluses, companies have largely not recognised this issue because their thinking has been too “short-term”.
According to Aon, employers should adopt contingent funding and investment strategies, which act to lock in out-performance, enabling contributions to be reduced at that time.
“The challenge is how to provide security without making unnecessary cash contributions that become trapped. The answer is …’contingent funding’.”
The newsletter added: “Contingent funding doesn’t solve all problems. But it can be a significant help.”
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