Rising wage inflation and falling investment returns mean that weaker pension funds will be unable to increase payments to members in line with inflation, according to the managing director of Hibernian Investment Managers (HIM) Mr Pramit Ghose.
And pressures on solvency at some of these funds may mean that they would not be able to make any increases in pension payouts over the next few years, he warned.
The pension schemes under pressure will be mature funds with relatively high numbers of pensioners and/or older members which operate defined benefit schemes and try to increase pension payments each year in line with inflation.
While well funded, defined benefit pension schemes "will probably not suffer too badly" particularly where their actuarial valuations have made allowances for the current high levels of stock markets, he warned against complacency.
In defined benefit schemes members get pensions related to their salaries, for example two-thirds of final salary.
The alternative is defined contribution schemes in which the final benefit is decided by the contributions paid in and investment performance over the life of the scheme.
Rapidly rising wages and salaries are putting strong upward pressure on the payments out of pensions funds while at the same time the investment earnings of the funds are falling, Mr Ghose said.
Wages and salaries are increasing more rapidly than the Consumer Price Index measure of inflation, according to HIM economist Ms Fiona Adkins.
Because payments out of defined benefit pension schemes are linked to final salaries, they will increase at about the same rate as salary inflation.
HIM is forecasting average annual inflation of over 4 per cent in coming years and wage inflation of around 8 per cent per annum.
"Several year of inflation at these levels would add up to very large outflows from these type of weaker pension schemes.
"These funds could have a negative cash flow in that the pensions they pay out to retired members could exceed their inflows from contributions," Mr Ghose said.
At the same time as outflows are being pushed up, inflows to pension funds from investment returns are expected to fall back from the high levels of the last few years, he forecast.
"Investment returns have been very strong over the last decade and were well ahead of wage inflation, hence wage inflation was irrelevant," he said.
"But now the equation is changing. Stock markets are at high valuations and the property market has had a strong run. Annual wage inflation is expected to be around 8 per cent and achieving the required investment return of 10 per cent suggested by our models in this scenario will be a tall order," he said.
The "cosy arrangement" of the last decade in which the assets of pensions funds - from investment returns and contributions from members - grew faster than their liabilities is not likely to happen in the foreseeable future, he said.
As a result, weaker funds will be forced to consider not giving their pensioners the full CPI (inflation) rate of increase in their pension payments.
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