Different perspectives on strong surplus creates ‘disconnect’ between trustees/employers

A difference in perspectives on defined benefit (DB) schemes’ recent strong funding levels has highlighted a “real disconnect” between trustees and employer management, according to RSM UK.

The firm noted that some employers have begun to express concerns about over-funding their schemes and not being able to recover the excess.

The most recent Pension Protection Fund (PPF) 7800 Index showed the aggregate DB pension surplus fell for the first time in six months to £254.3bn at the end of July, down from £267.9bn a month prior.

RSM UK covenant assessment services partner, Donald Fleming, stated that while The Pensions Regulator (TPR) has suggested that contingent funding contributions linked to suitable funding and risk triggers should help address employers’ concerns, this “does not address the difference in perspective”.

“If the covenant is viewed by the trustees as relatively strong, it is rational for the employer management to ask why it should now commit to crystalising a major liability in a few years’ time, rather than keeping its options open, when only a limited number of schemes can pay the buyout premium without a large payment from the corporate,” he said.

Fleming added that this was often the case when the employers are part of large publicly listed corporates where perhaps senior management is stationed overseas, or when there is little perceived shareholder value in doing so.

“This difference in perspective means that there is often a real disconnect between trustees and employer management over funding strategies and objectives,” Fleming continued.

“There has been a sudden shift in the macro-environment after the Covid-19 pandemic, with employers re-examining the fundamentals of their business models, supply chains and ESG resilience.

“Perhaps this is the right context for trustees and management to re-examine the fundamentals of their pension scheme and understand these different perspectives.”

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