The only way is up… or is it?
09 June 2016
The problem of funding UK defined benefit pension schemes grows each year. This is confirmed by the recent funding survey from tPR showing that pension deficits have risen, with the tPR estimating most schemes will see a deficit increase of 20-25% this year. This deficit growth is despite regular employer contributions and results from scheme liabilities growing at a faster rate to scheme assets for most schemes since their last valuation.
To counteract this, the tPR recommends that, where possible, trustees seek increased contributions from their employers who, as their evidence suggests, are now able to afford these higher contributions without hindering their growth rate.
For many, this is going to result in protracted and intense funding negotiations. Employers still consider that over time, gilt yields will rise and deficits will improve of their own accord whilst trustees are under pressure to demand cash as soon as possible.
This stalemate between employers and their trustees is not new, however it is costing both sides’ time and money to work through these lengthy negotiations.
I have increasingly seen contingent assets being the key to unlocking these negotiations. Reservoir Trusts are being used more and more to provide long-term security whilst preventing trapped surpluses. Asset Backed Contributions (ABC) are helping to bring the deficit number down and provide trustees with the necessary security to reduce cash demands from their employer. For example, loan notes from overseas parents are growing in the ABC space as they provide trustees with access to new parts of an international group along-side a secured income stream.
Deficits and cash demands are on the rise but that doesn’t have to be the case…
If you would like to discuss further please contact me.