DB deficit reduction could eat up a third of PLCs’ cash – Pension Corporation

Companies will pay more than £100bn in deficit reduction payments over the next three years, representing 13 per cent of their cash holdings, according to new research from Pension Corporation.

The survey, of more than 170 trustees and pension professionals, representing aggregate liabilities of at least £50bn, found 46 per cent of trustees expect funding levels to be worse than at the last valuation and 37 per cent of trustees expect to negotiate an increase in sponsor contributions, with 20% of them seeking increased payments of more than 10 per cent. It also found 22 per cent see their corporate sponsor as weaker than at the last valuation and 29 per cent expect to see lower asset returns in the future. And while 41 per cent of trustees view inflation as only a minor concern, 53 per cent have taken no steps to reduce longevity, inflation and investment risk exposure.
The survey, “The future of Pension Schemes 2012”, suggests employer contributions over the last three years have gone towards compensating schemes for underperformance rather than reducing liabilities. This could push trustees to ask for big increases, potentially pushing sponsors’ contributions above £100m, the report suggests.
The report also concludes many schemes are still exposed to longevity, investment and inflation risk.
David Collinson, co-head of business origination, Pension Corporation, says: “The Government talks of introducing a Defined Ambition pension system. The reality for many members of private sector DB schemes is that this is exactly where they are today. What many in the pension system fail to realise – or worse are afraid to say – is
that those members who hope to start drawing their pension in the next few years or decades will not necessarily be getting what they were promised today.
“Excessive costs caused by too much misguided legislation, poor matching of investments and liabilities and the overall economic environment have combined to create a perfect storm which will very likely wash away benefits from a significant minority of members of defined benefit pension funds. Hard pressed sponsors may well despair that the huge amounts of money they have put into pension plans seems to be eaten up by continued asset and liability underperformance.”