By Daniel Hunter
PwC analysis shows that FTSE350 companies’ ability to support their defined benefit (DB) pension obligations is still far below pre-recession levels and doesn’t appear to be getting any better.
According to PwC, the new economic realities of low interest rates and investment returns and high inflation mean scheme deficits are unlikely to improve without action from companies and trustees. This raises the risk that companies will need to divert even more cash into their DB schemes or make payments for longer, rather than relying on investment returns, to make good the deficit.
PwC’s Pensions Support Index, which tracks the overall level of support provided to DB schemes out of a possible score of 100, now stands at 74. The Index had shown a steady improvement since the March 2009 low of 64, but since the start of the year has stabilised at 74 and shows no signs of further improvement. This is far below the 88 level achieved in early 2007.
“We are no longer in a standard economic cycle. We are living in a world of low interest rates and investment returns and relatively high inflation, meaning that without action, pension scheme liabilities are likely to remain at their current high levels," Jonathon Land, pensions credit advisory partner at PwC, said.
“If investment returns remain low, and company earnings do not rise in line with inflation, companies will find they are paying a greater share of those profits towards covering their pension deficit. This will only add further pressure on those companies that are already weak.”
Jeremy May, pensions partner at PwC, added: “Companies need to consider the amount of risk they are able to run in their pension schemes when working with trustees to determine their investment strategy, funding assumptions and recovery plan. The Pensions Regulator has been encouraging this with its recent announcements in relation to financial management plans and a consultation is expected early next year.
“With government bonds offering historically low yields, pension schemes need to challenge their traditional thinking on investment strategy. This could include reducing government bond holdings and increasing their exposure to well diversified businesses which could provide a better risk return balance or seeking insurance-based transactions that potentially lock in enhanced returns.”
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