THE National Association of Pension Funds (NAPF) has called for urgent government intervention to help employers with defined benefit (DB) schemes manage the run-off of liabilities, reports sister publication Professional Pensions.
A new issuance of index-linked gilts and a framework that permits more flexible DB models would support businesses with maturing member profiles better match funding to benefit requirements, it argued.
In its latest report, DB run-off: The demand for inflation-linked assets, the NAPF also called for increased uptake of alternative inflation-matching investment options.
The organisation predicted a continued increase in liability hedging as DB schemes mature, which will contribute to the gap between supply and demand of index-linked gilts.
If schemes are unable to access the assets to meet cash flows and hedge liabilities, deficits will become more volatility and employers will have to make higher cash contributions, it warned.
NAPF director of external affairs Graham Vidler (pictured) said DB schemes are struggling to find the right assets to invest in as their scheme matures.
Vidler explained: “If, in order to reduce volatility, schemes are forced buyers of liability matching assets with low or negative real yields, sponsors will be called upon to fill any shortfall that can no longer be met through scheme investments.
“Unless the supply of assets is addressed, and quickly, the costs of providing member benefits could continue to rise and place even greater pressure on scheme sponsors.”
While there is “no quick fix solution”, the report’s suggestions could immediately alleviate some of the pressure of on employers looking to run-off their schemes, he added.
Last year, pensions minister Steve Webb proposed a more flexible DB regime free of indexation and survivor benefits as part of the government’s Defined Ambition project. However, this ‘DB-lite’ model was not included in this year’s Queen’s Speech, which confirmed plans to introduce Dutch-style Collective Defined Contribution (CDC) schemes to improve retirement outcomes.