Soaring liabilities mean government plans for a sympathetic approach to
pension scheme funding face “a baptism of fire”, according to Towers Watson.

The consultant warned that employers and pension fund trustees face choosing between dramatically higher contributions or much longer-lasting scheme deficits as they agree new funding plans at the start of the new tax year. The latter would test the governments’ commitment in the Budget to see the Pensions Regulator be more supportive to employers’ growth plans when policing scheme funding strategies.

Towers Watson head of UK pensions John Ball said: “Many employers will find that the substantial sums injected into their pension schemes have not even allowed them to stand still. If a scheme’s plan to clear its deficit is behind schedule, the response will usually involve some combination of pedaling harder to catch up and accepting that it will take longer to reach the destination.”

The Budget may encourage sponsors to push for the latter, he added: “When companies think about their red lines for negotiations with trustees, they will be well aware that the government appears to be striking up a more employer-friendly tune.”

The week before the new tax year is the most common funding positions used in actuarial valuations funds typically undergo once every three years. The position is calculated according to current market conditions, with the impact varying significantly even between the two most common valuation dates, according to Towers Watson. Those revalued on March 31 will have fared much better than those done on April 5, when the record low annualised real yield on twenty-year index-linked gilts of -0.58 per cent will have pushed up liabilities.

In most schemes, however, the rise in liabilities has increased much more in cash terms since 2010 than the increase in assets.

Ball also predicted a rise in the number of schemes looking at other solutions to ensuring adequate funding.

“This is an uncomfortable trade-off, so there may be more interest in alternative solutions such as using some of the employer’s other assets to shore up the pension scheme as well as paying in cash,” he said.

Share Story: