FTSE 350 company pension scheme support ‘polarised’ – PwC

Support for company defined benefit schemes in the FTSE 350 remained largely unchanged in 2018, although company support is polarised, according to PwC.

In its 2019 Pension Support Index (PSI), which tracks the relationship between the financial strength of FTSE 350 firms and the size of their scheme contributions, rating the overall level of support offered by companies to their schemes, gave an overall score of 87 for 2018.

This is the same figure as at the end of 2017, when covenant strength returned to pre-recession levels for the first time since the financial crash.

It found that 55 per cent of scheme were showing very strong levels of support, while the rest were “evenly distributed” across the index from strong to weak.

Schemes with ‘very strong’ support are able to pay off their self-sufficiency deficit within one year of dividends, which PwC said “raises the question of how much corporate cash should be paid into a pension scheme as opposed to dividend payments to shareholders”.

The firm also noted that The Pensions Regulator (TPR) is expecting scheme to act “more like a bank or bond holder would in a negotiation” to protect the rights of members, following the insolvencies of Carillion and BHS.

It said that TPR is taking a more proactive approach by focusing on shorter deficit recovery plans and equitable treatment of schemes, while trustees and employers are facing increased pressure in funding a balance between deficit contributions and dividend payments.

The report added: “This has focused both the public and politicians on improving the funding position of DB schemes, with the clear reputational, economic and social risk of similar events happening elsewhere.”

Commenting on the findings, PwC head of pensions credit advisory practice, Jonathon Land, said: “Regardless of where a scheme sits on the PSI scale, TPR is being more proactive and expecting strong employers to pay off their deficit faster, whilst weaker employers should be protecting and enhancing covenant strength.

“The coming 12 months will see a renewed focus on the question of how company cash should be split between shareholders and the pension scheme.

“The high level of restructuring activity over the last year, in particular in the retail sector, has on many occasions involved schemes with covenant scores towards the weaker end.

“The focus for trustees in these situations is to look to maintain the covenant through the restructuring, and strengthen it if possible.

“Whether corporate or trustee, the PSI score should heavily influence pension strategy. The days of TPR acting as a referee rather than a player are over and we can expect to see pension creditors behaving more like financial lenders.”

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