Final salary pensions are at risk, due to the ‘new normal’ of a sluggish economy and low returns.

That was according to a new report from the International Longevity Centre.

Researchers claimed permanently lower growth and interest rates coupled with a rapidly ageing population means urgent action is required to prevent more Defined Benefit scheme collapses like BHS.

The study suggested the weak growth and low returns on ‘safe’ assets such as government bonds experienced since the financial crisis may represent the ‘new economic normal’, meaning that DB pension deficits will remain high with potentially negative consequences for wages, firm profitability and retirement income.

In the last decade, the asset allocation of DB schemes has shifted from fixed interest bonds representing 28.3% of investments in 2006, to 51.3% in 2016, the report stated.

The report argues that the private sector DB world faces a “very real problem whereby persistent deficits will continue to pose challenges for all stakeholders”.

It said the following would happen:

• Firms will have to continue plugging pension deficits,
• Pensioners may have to take haircuts on the level of pension income they were originally promised.
• Employees may have to forgo wage rises and larger employer contributions to DC pension schemes.

New analysis conducted for the report also finds that if between 2000 and 2015, the money that was used to plug private defined benefit pension deficits had instead been redirected towards wages, average salaries could have been £1,473 higher by 2015.

Ben Franklin, head of economics of ageing, ILC-UK said: “Adverse economic conditions and an unprecedented demographic shift towards an ageing society has put the sustainability of private sector DB schemes in doubt. Despite schemes being closed to new members, increased life spans and the persistence of a low interest rate environment means the issues surrounding private DB will not abate any time soon.

“We hope this report can kick-start a debate that leads a set of socially and economically acceptable solutions to the challenge. None of this will be easy, but simply hoping for interest rates to return to normal is futile.”

Jennifer Donohue, head of global corporate and transactional insurance at Ince and Co, said: "The problem has been growing in seriousness for over a decade and we have assisted some of our clients to avert difficulties in the face the increasing pension deficit scourge. However the issue is exponentially growing as the call on the funds of defined benefits schemes tightens and the yield on investment continues to fail. The effect of this pincer like movement will affect numerous companies and financial institutions.”