Guest Comment: Can schemes afford to take a funding holiday?

As DB scheme funding improves, more schemes are finding themselves fully funded or with a modest surplus. With that comes a question which most schemes haven’t considered since the 1990s – can the sponsor have a contribution holiday?

The idea is enough to generate crossing of arms and sucking of teeth. Contribution holidays are widely, but often incorrectly, held responsible for the deficits we’ve lived with for so long. So why should trustees agree to something which previously caused so much harm or controversy?

The position today is quite different. For one thing, schemes are much better funded. A typical 1990s valuation assumed 9 per cent investment return for the lifetime of the scheme, with no reduction in risk or return as the scheme matured. Today almost all schemes are measured on a much lower, and often reducing, discount rate.

The potential impact is also normally lower. Most schemes have limited, if any, future accrual, so a holiday from those contributions may be quite modest. More commonly, a sponsor might ask for a break from just scheme expenses and/or PPF levies.

Contribution holidays may not sit well with trustee boards, but if the scheme has more assets than it prudently needs to pay benefits, why should trustees not agree?

Member communication will be a challenge. The regulator may be interested. And the media certainly will. But if the alternative is to keep putting money into a scheme that doesn’t actually need it, surely that doesn’t make sense?

The real answer is that full funding on Technical Provisions isn’t the end. It’s just a point on the journey. But that’s a topic for another day.

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