FTSE 350 companies’ ability to support their defined benefit pension obligations has stalled and shows little signs of improving any time soon. PwC analysis shows that the recent gains in the stock market and a renewed confidence in the economy are not yet feeding through to more manageable pension deficits.
PwC’s Pensions Support Index, which tracks the overall level of support provided to defined benefit schemes in the FTSE 350, now stands at 76 out of a possible score of 100. The Index was improving since the low of 64 in March 2009, but since December 2011 has remained relatively flat and has only improved by two points. There are few signs the situation will recover to anywhere near the 88 level achieved pre-recession in the short term.
The continued uncertainty over when, and if, the signs of economic improvement will feed through to more manageable pension scheme deficits means companies, trustees and the Pensions Regulator are all considering how to protect their position in the current ‘new normal’ economic environment. This should include pension schemes following the regulator’s guidance and taking a more integrated approach to risk management.
Jonathon Land, pensions credit advisory partner at PwC, said:
“Ignoring the strengths and weaknesses of their company sponsor is leaving some pension schemes vulnerable to risks that impact on both the pension scheme and employer at the same time. The Pensions Regulator’s focus on schemes taking a more joined-up approach to investment, funding and covenant will help reduce the risks defined benefit schemes pose to companies.
“Pension schemes’ strategic decisions should be based on the level of risk their employer covenant can support, the contributions an employer can afford and sustainable investment in the long-term future of the company. This will lead to a more collaborative approach between employers and trustees, and better alignment with a company’s future business plans.
Steven Dicker, pensions partner at PwC, said:
“Given the continued economic uncertainty pension stakeholders can’t simply wait and hope for improvements to their pension scheme’s position. They need to get proactive and look for ways to improve their investment performance and more innovative funding mechanisms such as asset backed contributions to provide continued security to the scheme. Without action defined benefit pension obligations will remain a huge drag on companies’ balance sheets and could halt their growth prospects.”
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