In response to the Coronavirus crisis, the Pensions Regulator has allowed pension fund trustees to agree with companies to delay making contributions where the firm faces serious economic challenges, subject to certain safeguards. In particular, firms must also be cutting back on dividends and bonuses and must have explored other methods of easing their short-term cash-flow problems.
Household name firms who are reported to have sought to delay making ‘deficit repair contributions’ include Arcadia and Debenhams, but LCP analysis suggests that hundreds more firms could be in a similar position.
Results of a survey of more than 100 industry experts at a recent LCP event on DB pension funding have been combined with analysis of data on more than 200 schemes where LCP acts as an adviser to estimate that at least 10% of sponsoring employers are likely to delay making contributions by at least 3 months.
As at 31st March 2019, the Pension Protection Fund indicated that there were 5,436 defined benefit pension schemes in operation in the private sector, suggesting that more than 500 could see contributions put back.
Data prepared by the Office for National Statistics shows that, in a typical quarter, employers pay around £5.5 billion into Defined Benefit pension schemes, with the large majority of this being to clear deficits. If 10% of schemes see a delay, this would suggest around half a billion pounds will be held back.
Some reasons why some employers may not seek to take advantage of these new easements include:
• A substantial minority of schemes are in surplus and have no deficit recovery payments;
• Some employers are in sectors which have not been as adversely affected by the current crisis;
• Some deficit contributions are only due irregularly (eg annually or twice yearly) and the next contribution for a given scheme may not be due for some months;
• Some employers may judge that maintaining their contributions now will help support long-term plans for tackling the deficit;
Commenting, Jill Ampleford, partner at LCP said: “Some firms that are fundamentally sound are nonetheless facing huge short-term cashflow pressures during the present crisis. The ability to agree with trustees a delay in making pension contributions will help them to weather the present storm and continue their support to the scheme in the long-term. But it will be vital to get things back on track once the crisis is over so that a realistic plan is put in place to deal with the shortfall in the pension scheme, particularly as this could have materially increased due to changes in financial markets”.
Steven Taylor, partner at LCP added: “Generally, the best way to ensure that member pensions are paid is to ensure that the sponsoring employer stays in business. In the short-term, this may mean easing cashflow pressures, including agreeing a package of measures with creditors that includes holding back on agreed pension contributions for a short period of time. Most employers will not take this step lightly and will do so only when other avenues have been exhausted”.
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