UK Consultant Warns Against Pension Surpluses

May 10, 2006 ( - Funneling money into employee pension funds when interest rates are low and liabilities are inflated, could create pension surpluses, trapping money into a fund that could have been better used elsewhere, warns one consultant.

At a pension fund strategies conference in London, head Aon consultant Ian McKinlay likened the current pension funding regime to a “ringed fence,” according to Investment & Pensions Europe magazine. Pension surpluses could be the next ‘pension scandal’, McKinlay told magazine.

According to Aon estimates, a typical plan has a 60% chance of being in surplus within 10 years, and a 25% chance of being more than 120% funded.

McKinlay told IPE that while the UK’s pension regulator would probably welcome surpluses, companies have probably not considered what effect these surpluses will have in the long term.

In order to avoid over-funding pensions, employers should consider adopting contingent strategies that lock in out-performance and allow contributions to be reduced when they hit a certain ceiling, McKinley told IPE.