How BBC scheme cut £750m off its funding deficit

This is in line with many other defined benefit schemes, which have steadily decreased investment in equities in favour of alternative assets, to protect returns to plug deficits.

A spokesperson for the broadcaster said they estimate the scheme’s deficit could have been £750m higher if they had not sought to diversify its investments. The last valuation in April 2010 revealed a shortfall of £1.13bn.

“We have been reducing our exposure to equity over the past 10 years. The reason for this is that if we hadn’t taken that response we would have had a bigger deficit,” she added.

The £10.3bn BBC fund had 38 per cent of its portfolio allocated to equities at the end of the 2012/13 financial year, according to its annual report. This is compared with 45 per cent during the previous year and 48.4 per cent in 2010/11.

Duncan Lamont, principal with Aon Hewitt’s asset allocation team, said schemes are increasingly employing investment strategies that would diversify their portfolio.

“There’s also a dissatisfaction with the volatility that [investing in] equities brings,” he added.

The fund produced an overall annual return of 13.1 per cent compared with 5.8 per cent during 2011/12 and 8.6 per cent in 2010/11.

Contributions

To help reduce the deficit, the BBC and its participating employers also agreed to make additional contributions to the scheme.

Between 2010 and 2013, the scheme contributed £290m with £100m due in 2014. The funding shortfall is expected to be eliminated by April 2021, according to the scheme’s report for 2012/13.

It is currently undergoing an actuarial valuation, with the outcome expected to be released next summer. The scheme's spokesperson said the result of the valuation will inform any changes to contributions.

Employers are generally increasing their contributions to schemes, experts have said.

There’s also a dissatisfaction with the volatility that investing in equities brings

Lynda Whitney, partner in Aon Hewitt’s retirement practice, said she has seen a big increase in employer contributions over the past three years.

Sponsors have the opportunity to employ alternative financing, for example putting assets like property into a special purpose vehicle, she said.

“It’s about a combination of different approaches, there’s no magic bullet,” Whitney added.

Employers are commonly increasing their contributions by both lengthening their recovery plan and increasing the amount of their payments.

Scheme managers have to balance the need to ensure the scheme is sufficiently funded, while ensuring the sustainability of the employer.

“We are seeing both trustees and corporates facing that deficit challenge of having to put more cash in and considering whether that’s the best use of a scarce resource of the sponsor, or whether that sponsor should be using that to invest in growing the business,” said Dickon Best, pensions director at consultancy PwC.

The pensions bill 2013/14, currently being considered by parliament, seeks to introduce a new objective for the Pensions Regulator that would take into account the sustainable growth plans of the sponsoring employer.