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Norman Russell looks at how companies are searching for ways of handling the long-term challenges of defined benefit pension schemes

Financial markets all too often force companies to focus on the short term. Pensions require the long view. Other than pensions, how many financial obligations do companies enter into where they will still be paying out 70 years hence? If you think 70 years is an exaggeration, consider a 30-year-old in a defined benefit (DB) pension scheme. The actuaries tell us one person in 200 born in 1908 was expected to live to 100; today it is one in four.

For many companies, that long-term DB liability is becoming a pressing short-term problem. Since 11 June 2003, companies have not been able to walk away from their DB pension liabilities. That was the date on which the Government announced the change in the law, eventually contained in the Pensions Act 2004, requiring companies to fully fund their DB schemes on termination.

Fully fund is an expression pension experts distrust. There are almost as many different bases and assumptions that can be used for valuing DB pension liabilities as there are things that MPs can claim on their expenses. In this Pensions Act context, full funding means the price demanded by an FSA-authorised insurer to take over the DB liabilities. So, if companies cannot escape their long-term DB liabilities (without paying an insurer a price likely to be well in excess of the deficit revealed in the company’s accounts), how are they grappling with the DB issue today?

Many are engaging in ‘liability management’ exercises:

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