Companies are taking longer to meet their pension shortfalls despite diverting more cash into their schemes, according to new PwC analysis.
PwC’s survey of 150 UK defined benefit pension schemes reveals that it will take companies with an actuarial valuation in 2013, on average, 11 years to repay their pension deficits due to deteriorating funding positions. The analysis shows repayment periods are now back to where they were in 2009 when equity markets were at an all-time low. Low government bond yields, which are still predominantly used by pension schemes to discount future pension payments, are being blamed for increased pension deficits and the resulting repayment periods. Relevant government bond yields fell from 4.6% p.a. to 2.9% p.a. between 6 April 2010 and 6 April 2013.
Nearly two thirds (63%) of schemes surveyed have extended the time it will take to reach full funding by three years or more in order to deal with an increased deficit. This means it will take many companies with defined benefit pension schemes until 2024 to pay off the deficits, whereas many were targeting getting back into balance by 2020 at their previous valuation.
The research reveals that over two thirds (69%) of pension schemes have increased their contributions since their last valuation. Schemes with valuation dates in 2013 have particularly suffered, with over 70% seeing a worsening of their funding position since their last valuation despite having pumped significant cash into their schemes since then.
Only 14% of respondents with valuations in 2012 or 2013 have an unchanged or shorter period to reach full funding than at their last valuation.
Paul Kitson, partner in PwC’s pensions advisory team, said:
“Pension schemes are still suffering from the effects of low gilt yields and an uncertain economic backdrop. Despite early signs of economic recovery, companies are still ploughing considerable amounts of cash into their pension scheme just to manage the deficit. This means money that could be reinvested in the business to promote growth, jobs or the strength of the company is too often being tied up in the pension scheme.
“While appropriate funding of UK defined benefit pension schemes is critically important to ensure security for pension scheme members, this increasing cash call on corporate sponsors could be a significant drag on companies’ ability to support any potential recovery of the UK economy over the coming years.”
The analysis reveals that, despite the Pension Regulator’s 2013 funding statement highlighting flexibility in the funding regime, this is little used in practice. Discount rates are still largely based on government bond yields and the number of schemes adopting contingent payment approaches or allowing for an average return on scheme assets rather than a prudent return has not increased significantly since last year’s survey.
Paul Kitson added:
“The survey shows that there is considerable scope for UK pension schemes and their corporate sponsors to set funding plans that provide security for members and flexibility for businesses to benefit from any recovery, which will ultimately benefit the scheme members.”
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