PwC’s Pension Support Index shows a three point decrease since 2014 to 80 out of a possible score of 100, despite a period of improving company performance. The index tracks the ability of FTSE350 companies with DB pension schemes to meet their collective pension obligations, indicating the overall level of employer support available.
Continued uncertainty over gilt yields, often used to value pension liabilities, led to the first decline in the index since September 2011. The question of support for pension obligations has become increasingly important in light of changing market conditions. Higher deficits may lead to greater demand for cash from pension scheme trustees, which could increase demand for alternative non-cash funding mechanisms, such as Asset Backed Contributions (ABCs).
Jonathon Land, pensions credit advisory leader at PwC, said:
"As the UK economy exited recession, we all thought that companies' ability to support their DB pension obligations could only improve. However, the fall in long term gilt yields has countered the effect of the improvement in the economy. The recent announcement on deflation will add further complexity to this.
"This is having a real impact on negotiations between trustees and companies. A year ago companies were saying yields would rise and many trustees were sympathetic to the view that deficits did not need to be fully funded. Today trustees are saying the deficit has worsened, and it could get worse still. It is proving hard for companies to respond to this challenge.
"Where deficits have grown, trustees are putting increased pressure on companies to work with them to hedge out any remaining risk, to increase contributions and to put in place Asset Backed Contributions to shore up the deficit."
Jeremy May, pensions partner and actuary at PwC, said:
“Following the general election, there has been an increase in market confidence that gilt yields will rise, which would in turn positively impact pension deficits. However, waters are likely to remain choppy, particularly with significant uncertainty in Europe.
“Trustees should consider what longer term impact movements in rates should have on their investment strategy. For those with a strong covenant and an investment strategy that is independent of gilts, the answer may well be no impact. Conversely for those schemes that have the desire or need to hedge this risk, consideration should be given to identifying how and when changes should be made.
Simon De Young, tax partner at PwC, said:
“Asset Backed Contributions have been relatively uncommon, used only by companies with balance sheet assets, such as real estate. However, we are now seeing companies use a broader variety of assets, from inter-company loans notes to brand names. ABCs are being used dynamically, to reduce cash commitments to the pension scheme and to optimise pension risk and investment strategies.”
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