For how long will defined benefit liabilities continue to grow?

Abstract

Many pension markets are experiencing a transition from defined benefit (DB) to defined contribution (DC) schemes, with most of the former being closed, frozen or wound up. Against this backdrop, this paper aims to calculate the DB market's future growth, but approaching the problem from the liabilities' side. We develop a general model whereby we can project DB liabilities based on the expected future trends in longevity, membership dynamics and salary growth. We then can deduce the expected future evolution of DB liabilities, which, if tied to assets, may be seen as an approach to predict the pension asset management market in the future. We apply this model to the UK pensions market. The main result is that even if all UK DB schemes are considered closed, DB liabilities still show a growing trend until the year 2017, reaching a maximum of 39 per cent above their current level and only returning to their current level around 2035.