Aon Hewitt has said that with defined benefit pension schemes climbing towards healthier funding status, they should be changing their approach and diverting sponsor contributions into alternative financing strategies.
Various measures of the funding status of schemes indicate that many are now over 100% funded. A recent survey of 86 Aon Hewitt clients with recently completed funding valuations showed that 30% of them were substantially above 100% funded while 42% of them were around 100% funded on a best estimate basis. Similarly, when viewed on an accounting basis, around 25% of FTSE350 schemes are now over 100% funded.
Paul McGlone, partner at Aon Hewitt, said:
“Pension schemes are clearly not out of the woods but as they seek stability they are doing so from a position which is different to where they were just a few years ago. Funding levels have improved substantially and you can make a case that many schemes now have enough money without further deficit contributions being made. From both cash and accounting perspectives, many sponsoring companies are therefore likely to be pushing back on any demands for further deficit contributions into a scheme.
“Companies and trustees will therefore increasingly view their schemes through different lenses, as the companies see the risk of trapped surplus, while the trustees still see funding deficits because they are required to consider a prudent funding basis. Companies will want to consider reducing deficit contributions, but trustees with schemes which are still underfunded on a prudent funding basis are likely to seek other means of security for members’ benefits if they are to accept the end of deficit contributions.”
Lynda Whitney, partner at Aon Hewitt, said:
“As they become less keen on paying in cash we are already starting to see more companies considering alternative ways of providing that security, including escrow, charges over assets, letters of credit, surety bonds and other mechanisms. The latest Aon Hewitt survey showed that 71% of large schemes with liabilities in excess of £1 billion and 27% of schemes with liabilities under £100 million already have some form of alternative financing and we expect these proportions to grow.
“As ever with pensions, there is no one-size-fits-all but we believe that alternative financing solutions are an option that every DB pension scheme should be considering as part of their strategy to reach pensions stability.”
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