UK pension liabilities have gone up by over 60% in the last five years according to research by KPMG.
The firm's 2013 Pensions Accounting Survey shows that since the 2008 financial crisis, pension liabilities have continued to outpace the growth in pension fund assets, which it says is largely due to falling yields on AA corporate bonds - used to discount the value of future benefit payments under IFRS.
Over the same period, a typical pension fund portfolio invested in a combination of equities (UK and overseas) and bonds (both government and corporate bonds) is likely to have returned closer to 40% including reinvestment of dividends and coupons.
Increasing life expectancy is also having an impact on pension liabilities, with a current 45 year old expected to live for nearly two years longer once in retirement compared to a current pensioner.
KPMG says the issues this raises are likely to become more acute in future as result of recent changes to IFRS rules and forthcoming changes to UK Generally Accepted Accounting Practice (GAAP) which mean pension deficits will need to be fully reflected on balance sheets.
Lynn Pearcy, KPMG's global head of IFRS employee benefits, said: '2013 will see full recognition in IFRS accounts with the implementation of IAS19 Revised, and by 2015 groups will also need to record pension deficits in parent or subsidiary individual accounts under the new UK GAAP, which may affect reserves or, at the extreme, the flow of dividends.'
KPMG has also identified a surge in the use of asset-backed funding (ABF) to plug gaps in pension scheme funding, with such deals increasing both in value and frequency. With ABF, companies use business assets to generate cash which is then put into the pension scheme.
The firm says in the six months from the end of September 2012 the value of ABF for pensions implemented by KPMG in the UK alone was £700m; more than the total of £600m seen in the market as a whole in the preceding year. It implemented 10 deals during this period, compared to a market total of seven in 2011.
The average size of ABF transactions is falling, with the firm calculating the average value of its ABF transactions in 2013 as £42m, compared to £138m in 2010. More than half the transactions were for £50m or less, with the smallest just £12m.
