The defined benefit model of pension provision is supremely unsuited to today’s world of low or negative interest rates. To establish the solvency of a pension fund, actuaries use a discount rate broadly related to current market rates to estimate the present value of pension liabilities. The lower the rate, the bigger the liabilities.

Today’s rates are a historical aberration. Not even in the depression of the 1930s did policy interest rates and the yield on government bonds turn negative. If market valuations revert to the mean, as they have always done, today’s liabilities will prove to be absurdly inflated. Yet actuaries are understandably reluctant to stray far from market values even though those markets have been comprehensively rigged by central bank bond buying programmes. In this hall of mirrors the one certainty is that today’s pension fund deficit numbers will turn out to be wrong.

Another consequence of central bank intervention is that the price of equities and other risk assets have soared, which means that future returns on these inflated valuations will be lower. Defined benefit pensions thus become very expensive to fund.

  Financial Times