Corporate Britain paying £5bn more than necessary into retirement plans

CORPORATE Britain is overpaying at least £5bn a year into pension schemes, according to research by PricewaterhouseCoopers (PwC).

UK-based firms are failing to calculate the gains that can be made over the longer-term, leading them to pay more than necessary into defined benefit pension schemes.

Outmoded ways of calculating the contributions needed to cover future pension payouts do not reflect the way pension scheme assets are invested and the gains that can be anticipated.

The mismatch has led firms to set funding targets about 10 per cent higher than necessary, the research claims.

Pension scheme funding targets often assume that funds held for retired workers will be paid for by lower risk investments such as bonds.

As the proportion of pensioners increases, funding requirements are being based on a greater proportion of low growth assets that, for many schemes, does not reflect the actual investments the scheme holds.

Jeremy May, partner in the pensions practice at PwC, said: “Current approaches to setting funding targets are too blunt, typically assuming schemes immediately switch investments into lower risk assets as members retire.

“The reality for most schemes is a more gradual transition of investments, particularly now life expectancies have increased,” he added.