By Daniel Hunter

Companies are making little progress in reducing the financial burden of their pension obligations as they fail to adapt to the new normal economy. PwC analysis shows that FTSE350 companies’ ability to support their defined benefit (DB) pension obligations remains far below pre-recession levels.

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 75. This is only a one point improvement since June 2012 and far below the 88 level achieved pre-recession in early 2007. The Index has been flat since September 2011.

According to PwC, the new economic realities of lower growth, higher inflation and low interest rates have put companies sponsoring DB schemes under significant financial pressure. This means it is more important than ever that companies and trustees work together to find constructive solutions to help pension schemes and protect members’ benefits.

Jonathon Land, pensions credit advisory partner at PwC, said: “Defined benefit pension schemes remain a huge financial burden on many companies’ balance sheets and the situation is unlikely to improve without real action from sponsors and trustees. The slow economy means pension schemes cannot afford to stand still. Stakeholders will have to be more innovative in tackling their pension issues and safeguarding their members’ benefits.

“Those companies that take steps to properly understand the options available to them will place themselves in a better position to help all their stakeholders as well as the pension scheme.”

Jeremy May, pensions partner at PwC, said: “Companies sponsoring DB pension schemes need to work harder to find returns in this new economic environment. This includes looking to non-traditional asset classes to achieve the required return, while meeting the schemes’ cash requirements over an appropriate timeframe. Companies also need to be prepared to explore a wider range of ideas, such as longevity hedging, asset swapping and cash-flow buy-ins to meet the schemes’ needs.

“Pension scheme sponsors are not making the most of the flexibilities available in assessing the funding status and setting recovery plans, meaning that often too much money is tied up in overly prudent assessments of deficits. Smarter investment strategies and techniques for assessing deficits could free up considerable cash for companies, which could instead be deployed to strengthen their businesses and the economy.”

A good piece of news to balance this is recognising that the position would have been much worse if the European Commission hadn't dropped the funding aspects of the proposed IORP II pensions directive. PwC analysis shows that if the proposals were implemented as proposed, this would have reduced the Pensions Support Index to a score of 60. This would have taken the Index to a lower point than in March 2009, putting the pensions industry back at least four years.

Richard Setchim, pensions credit advisory partner at PwC, said: "Our analysis shows how badly the pensions industry and wider economy would have been impacted by the funding aspects of the directive. Despite the welcome removal of the funding aspects of the directive, companies and trustees need to be on guard that Solvency II is not still introduced under the guise of governance - in the so-called ORSA provisions. This would require an assessment of a scheme’s risks against their available security mechanisms, including sponsor support."

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