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The Pensions Climate
There has been a massive increase in the number of organisations looking to reduce their pension risks and their cash commitment to pension schemes. According to the latest PricewaterhouseCoopers' annual pensions survey, "The number of companies looking to reduce or remove their pensions risks has increased massively." 1
Given the uncertain economic outlook, this is a trend that looks certain to continue. Nowhere is this problem of current cost and future liabilities more apparent than in the continued provision of Defined Benefit pension schemes, not least in Local Government where, according the Tax Payers' Alliance, "19% of council tax revenue is spent on funding local authority pension schemes". 2 The point is now being reached where some organizations now exist to fund their pension arrangements, to the detriment of both shareholders and future business development. "Ten years or so ago, many employers, thanks to a scheme surplus, were enjoying contribution holidays, but now they are paying more money than ever before into their final salary schemes." 3
"Quantitative Easing" may help an ailing UK economy, it will do nothing in the short term for hard pressed pension funds and their sponsor employers. Hymans Robertson estimates that quantitative easing has, overnight, added some £12Bn to the aggregate pension deficit of FTSE350 companies. 4
There are 'creative' approaches to addressing pension risks and future funding requirements, which include:
- 'Hedging' interest rates, longevity risks, and/or inflation, and;
- Scheme 'buyouts' and 'buy-ins'.
All of these involve cost and this at a time when cash is in short supply.
At Pension Review Associates, we prefer simpler, less costly, and more easily understood solutions. These include:
- Closing schemes to new entrants,
- Closing schemes to future accrual, and;
- Severing any link to 'final pensionable salary'
At PRA we have a successful track record of delivering these solutions!
1. Source: Professional Pensions 26th February 2009.
2. Source : Professional Pensions 5th March 2009.
3. Source: IDS Pensions Service (Pension Scheme Benchmarks).
4. Source : Professional Pensions 12th March 2009
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