Tackling pension deficits and risk - PwC survey

Pension schemes to take until 2024 to meet pension shortfalls

Companies are taking longer to meet their pension shortfalls despite diverting more cash into their schemes.

PwC’s survey of 150 UK defined benefit pension schemes reveals that it will take companies with a recent actuarial valuation 11 years on average to repay their pension deficits due to deteriorating funding positions. The analysis shows repayment periods are now back to where they were in 2009 when equity markets were at an all-time low. Low government bond yields, which are still predominantly used by pension schemes to discount future pension payments, are being blamed this time for increased pension deficits and the resulting repayment periods. However, pension scheme sponsors and trustees may be missing opportunities for a more realistic assessment of their deficit using more contemporary techniques.

Nearly two thirds of schemes surveyed have extended the time it will take to reach full funding by three years or more in order to deal with an increased deficit. This means it will take many companies with defined benefit pension schemes until 2024 to pay off the deficits, whereas many were targeting getting back into balance by 2020 at their previous valuation. The survey reveals that, despite the Pension Regulator’s statements highlighting flexibility in the funding regime, this is little used in practice. Discount rates are still largely based on government bond yields and the number of schemes adopting contingent payment approaches or allowing for an average return on scheme assets rather than a prudent return has not increased significantly since last year’s survey.

The survey shows that there is considerable scope for UK pension schemes and their corporate sponsors to set funding plans that provide both security for members and flexibility for businesses to benefit from any recovery, which will ultimately benefit the scheme members.

You can download the full report here.

See also our short video summary.

If you’d like help with the challenges involved in dealing with your pension deficit and risk management, you can contact your usual PwC pensions adviser or Raj Mody, Head of Pensions, on 020 7804 0953 or by email at [email protected]