The consultancy is calling for a system that balances affordability and security of occupational pensions.

Despite the recent equity market rally, the assets of occupational pension schemes will continue to fall far short of funding the full benefits promised to members, if schemes are wound up, says Mercer.

When equities reached their lowest level in 2003, Mercer estimated the total UK pension deficit on a non-profit annuity buy-out basis to be around £320 billion. The deficit has increased and is now estimated at around £330 billion.

Paul Greenwood, Worldwide Partner at Mercer, said: “Annuity rates have escalated because the life insurance market has become less competitive, and more insurers are now taking account of improved life expectancy.”

“Annuity rate increases have cancelled out the recent equity market gains, and there is still a huge gap between the cost of securing benefits and available assets. This needs to be addressed.”

Mr Greenwood warned that government rules introduced last June, which mean that employers forced to wind up company pension schemes must meet the annuity cost in full, would continue to become a burden on the economy into the future.

To tackle the problem, Mercer suggests that the Government should consider reducing the value of guaranteed benefits or accept a lower level of benefit security.

For instance, the value of members’ guaranteed benefits could be reduced by increasing normal retirement age or ceasing to guarantee pension increases in line with inflation.

Mr Greenwood added: “The current level of pension benefits can only be guaranteed at great economic cost. The sooner the Government recognises there’s a problem and adopts coherent policies to deal with it, the better.”