by Andrew Vaughan, FIA, Partner at Barnett Waddingham
Our recent research Exploring DB schemes internationally: Dutch companies with UK schemes found that UK DB pensions may be making a disproportionally large impact on the performance of the Dutch parent company. Indeed, although UK companies produce on average only 7% of the global revenue, they account for on average 44% of the global pension scheme liabilities and 33% of the global pension scheme contributions.
The report looks at Dutch companies, almost all of which are constituents of the AEX index, and have UK subsidiary companies with defined benefit (DB) pension schemes.
Focussing on twelve Dutch companies with around £48.8bn of UK pension liabilities between them, the research considers funding levels and actuarial assumptions on the company accounting basis, the impact of the pension scheme on the company’s financial performance, and company contributions paid, as well as looking at the impact of the UK on the global company.
What should employers consider to improve their DB funding levels?
Investment strategy – a scheme’s investment strategy is likely to be the largest long-term driver of funding position. Though the trustees of a scheme are generally responsible for decision making around investment, input from the company can drive improvements in investment decision making and this is likely to lead to improved funding level progression.
Actuarial assumptions – corporate bond yields are still low compared to historical levels and the resulting low discount rates have significantly increased the value of the DB liabilities disclosed in companies’ accounts. However, companies can make significant changes to their reported funding position by optimising the actuarial assumptions used.
Contributions – this includes contributions in respect of benefits for current employees, and also contributions in respect of past service deficits (which may be in respect of staff who have long since left the company). With many companies paying significant levels of contributions to their pension schemes, it is important that these companies manage their contribution requirements. This could be achieved through scheme funding negotiations with the trustees of the scheme, putting in place a parent company guarantee to improve the company covenant, or managing the size of their Pension Protection Fund levies.
Liability management – there is a range of exercises that companies can undertake to remove risk from the pension scheme and help improve the funding level, including transfer value exercises, pension increase exchanges, flexible retirement offers and trivial commutation exercises.
Other highlights of the research show:
The average funding level on the company accounting basis was 95%, which was slightly higher than the average funding level of FTSE350 companies’ DB schemes of 94% at the same date
The past service deficits expressed as a percentage of shareholder funds were on average 37%, suggesting that these are sizeable schemes in relation to the size of the sponsoring employers
Similar trends were also seen in the Southern European and French surveys.
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