Patrick Bloomfield, Partner, Hymans Robertson: “Pension deficits for FTSE 350 companies are at around £85bn but our research shows that deficits are actually manageable for most FTSE 350 DB Schemes: 90% have a pension deficit of less than 10% of their market cap and 85% of the FTSE350 able to pay off their deficits with 6 months’ earnings. Whilst Carillion is an unwelcome development, which will lead to a call on the PPF and a reduction in members’ benefits, it is the exception rather than the rule.
“The PPF should be able to withstand the Carillion situation. The PPF is an exemplar of strategic risk management. It has clear long term objectives, actively targeting and monitoring chances of success and risk metrics and with scenario analysis and contingency plans. This has made it increasingly resilient to sponsor insolvency risk.
“If these practices were the same across all UK DB we’d have a much less risky system. The overly simplistic focus on deficits which is being reported is a root cause, as it creates an incentive to take too much investment risk and not pay in enough cash. We need to challenge the prevailing sentiment that is it bad to take longer to pay off deficits. Longer deficit recovery period coupled with more measured investment risk usually results in better chance of paying members pensions without pushing employers into financial difficulty. We must remember that DB pension promises typically extend for the best part of a century, trustees don’t need to rush towards the exit and risk tripping the employer’s own shoelaces.
“Many schemes continue to invest too much in volatile equity heavy portfolios, leaving too much to chance. Equity markets may be at all-time highs, but this is only half the level that was expected back in 2000. Insufficient interest rates hedging has increased pension liabilities by over 50% since 2000 and higher life expectancy has added another 15%. So despite companies committing hundreds of billions of pounds towards pension schemes since 2000, accounting deficits now stand at around £85bn for the FTSE 350 (at 31 August 2017). The shortfall for these schemes to buy their liabilities out with an insurer is around four times larger again. The big bets taken by pension schemes so far this millennium haven’t paid off. And pouring more cash into schemes hasn’t worked. So why do we think it will now?”
Anne-Marie Winton, Partner at ARC Pensions Law: “Heavy reliance is placed on having a cooperative working relationship between company and trustees, and information flows seem to have been lacking in this case. The trustees appeared to have to rely on public domain information to assess Carillion’s ability to pay. A suggestion was made that the Government ought to have been sufficiently informed about the inability of the company to fund its pension scheme and prevent further contacts from being awarded.
“The most recently appointed trustee said that the scheme’s ongoing funding level is in the public domain, hence already available to the Government, but this simply isn’t correct. Whilst a scheme’s members are updated annually in regards to the funding position by the trustees, this is a private document that, unless leaked to the press or online, is not publicly available.”
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