PwC has revealed that a new approach to how liabilities for pensioners in defined benefit schemes are funded could free up an additional £40bn.
It comes as part of the firm’s response to the Pension Regulator’s (TPR) ongoing consultation on future regulation.
TPR is reviewing how it regulates the funding of defined benefit pension schemes in the UK, with first-stage consultation responses being submitted earlier this month.
Its analysis found improvement would come from avoiding pensioner liabilities being closely tied purely to gilt investments, which could be supported by a diversified portfolio of cash flow-matching bonds and other low-risk income-generating investments.
Raj Mody, global head of pensions at PwC, said: ‘‘The pensions industry has been shoe-horned into an undue focus on referencing everything back to gilts, as a so-called risk-free benchmark.
‘‘While that doesn’t stop individual schemes doing their own thing, the trouble with this kind of reference point is that it creates a herd mentality. This then puts pressure on trustees or companies looking to follow a more bespoke approach, even if it’s a better strategy for their own pension scheme.’’
He added: ‘‘Over the last decade, pension scheme investment in gilts has doubled from 23% to 45% of their assets. The proportion of pension funds related to paying current pensioners is 40%.
‘‘This shows that there is a drift towards using gilts, which partly comes from having rules and regulations framed around gilt yields. But analysis shows this is not necessarily the most optimal solution for every pension fund.’’