Although I don't believe that we should be using discount rates at all for longterm financial entities, using “prudent” discount rates has led to a hugely severe DB economic impact. From the adjustments chart, it is reasonable to conclude that there is no way that we could even have guessed in advance by how much the discount rate would have failed to lead to a satisfactory outcome. The contracts I have considered are relatively simple, so the outcome could hardly be likely to be better for complex DB pension schemes.
Although currently suspended, the ONS "MQ5" series provides some really useful data. Over nearly 10 years [Q2 2009 to Q4 2018], I've looked at UK employers’ DB pension contributions for the private sector alone. The total paid was 333.9 b (sterling) of which special contributions accounted for 135.5 b (68% of normal).
Suppose that the discount rate was underestimated by 1.5 % pa, a very conservative estimate. Indeed, one can easily reach 1.0 % pa from inflation alone (ukrpi.com). That implies at least a 30% difference in capital value so at least 100 b (private sector) was misallocated in UK. Could the heavy financial burden be a partial explanation for low UK productivity over that period?
Yes, 100 b is my personal estimate but you can choose your own yield adjustment and come to your own conclusions.
