Many employers and defined benefit pension scheme trustees face tough choices between finding the money for higher contributions and allowing deficits to persist for longer, according to Towers Watson. The warning, which concerns schemes that must reach new funding agreements based on recent market conditions, comes as the Pensions Regulator prepares to unveil its new approach to policing schemes’ funding strategies.
Tomorrow, the Regulator will publish its revised Code of Practice on pension scheme funding, alongside its annual statement on current market conditions. The Regulator reviewed its approach to scheme funding after the government gave it a new, more employer-friendly objective. As well as protecting members’ benefits and reducing the risk of claims on the Pension Protection Fund, the Regulator is now expected to ‘minimise any adverse impact on the sustainable growth of an employer’.
Employers and trustees usually negotiate a new funding plan once every three years. It is common for these to be based on snapshots of schemes’ financial health taken in late March or early April.
Graham McLean, a senior consultant at Towers Watson, said: “Employers have put a lot of money into pension schemes over the past three years, but deficits are typically bigger in 2014 than they were in 2011. Assets have grown but liabilities have grown faster still, partly because bond yields are lower.
“In most cases, either the scheme will have to push back the date by which it expects to be fully funded or the employer will have to increase its annual contributions. Often, it will be a mixture of the two.”
Some of these changes will be very significant. Towers Watson modelled a hypothetical scheme that had been aiming to increase its funding level from 80% to 100% over 10 years, starting in 2011. To remain on track to clear its deficit by 2021, annual contributions would have to increase by 80%. To avoid any increase in contributions, the scheme would have to anticipate remaining in deficit for an additional eight years. Although these calculations are very scheme-specific, Towers Watson expects most schemes to have bigger deficits in March/April 2014 than in March/April 2011.
Graham McLean said: “Most trustees understand that pushing for the employer to contribute more than it can afford would threaten the viability of the scheme. However, bigger deficits could still represent a baptism of fire for the Regulator’s attempts to balance its objectives – especially where the employer has more money than it did three years ago but also has other ideas about how to use it.”
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