UK pension schemes are being forced to come up with ever more ingenious ways to cap and control their liabilities.

At the end of May it was estimated the UK private sector defined benefit schemes have a combined deficit of liabilities over assets of £185bn and an average funding level of 84%.

Most schemes would like to buyout their liabilities with an insurance company, but this is way too expensive – it is reckoned that a full buyout has a 40% premium above being fully funded on an ongoing basis. As a result, schemes are seeking ways to trim their liabilities where they can.

One widely used method is an enhanced transfer value exercise, where former employees of a firm, who are still in the pension scheme, are offered an inducement to transfer out.

The inducement is an increase to their normal transfer value, or accrued benefits, paid for by the employer and this may be in the form of cash. While this method of encouraging members to leave a scheme is increasingly used, it is the subject of some controversy.

The Pensions Regulator recently said that scheme trustees should assume that transfer incentives are not in members’ interests and they should take care over such exercises.

On the other hand, pension lawyers say there is nothing to stop employers giving members a choice between staying in a scheme and transferring out on enhanced terms. However, it is recognised that there possible reputational issues and such exercises need to be handled carefully.

At the same time, offering cash payments, which are taxable, is seen as the surest way of getting members to act and there is talk of 40% take-up rates being achieved when cash is offered.

Other options are to approach members who are eligible for early retirement and encourage them to start drawing a pension, as this reduces scheme liabilities.

Pensioners may be offered a higher flat-rate pension instead of future increases to their pension. This may be attractive to some pensioners, but with increasing longevity and possible inflation in the future, it may lead to greater poverty in old age.

The fact that so many ordinary scheme members are now being encouraged to act in the interests of their scheme sponsors must cause some concern.

Many members will be swayed by ‘jam today’ offers and could be jeopardising their long-term interests.

Unfortunately, employers are being forced to act in ways they might not normally do by the pressures of scheme funding and the need to shore up their finances.

For instance, last week BT was told it could not increase its wholesale charges to help fund its pension deficit, making it more likely that it will engage in what are called liability management exercises.

As with many problems in the UK pension system, the complexity and opaqueness of pensions means that many ordinary members have a limited understanding of how pensions work and what they should be doing.

Pension providers exploited this in the past by selling expensive and inflexible products, particularly in the 80s and 90s.

Now, occupational pension schemes, who were previously ‘the good guys’, are being forced to stoop to levels they would probably prefer not to, in order to ensure their own survival.