Pension scheme deficits now extending further into the future

The latest PwC survey shows that businesses are taking longer to clear pension scheme deficits

In my most recent blogs, I have been considering pension scheme deficits, and pertinent to this would be some recent PwC research, showing that more than half of company pension funds have lengthened their deficit recovery plans by three years or more. Our 2015 pension scheme funding survey, which looked at emerging trends from pension scheme funding valuations, found that plans to repair deficits are now being pushed further down the road – an indication of the relentless drag trying to deal with stubborn deficits has on pension fund sponsors and trustees. 

The survey, of 213 pension schemes representing around £180 billion of assets, looked at a wide range of issues, from recovery plans and dealing with deficits to integrated risk management approaches and assumption benchmarking. The findings have consequences for both corporate sponsors and pension scheme trustees.

It found that 71% of schemes have extended the length of their deficit recovery period by three years or more, compared to 63% in the previous survey. The average target date for full funding has extended by three years since the start of this decade and now stands at 2023. Some schemes, though, are not expecting to be fully funded until 2040. 

A more balanced focus? 

These trends may reflect the impact of a more balanced regulatory focus around how pension deficits are dealt with by companies and trustees. Two-thirds of the survey’s participants said they take the employer's own sustainable business growth plans into account when setting deficit repair plans. 

The survey also found that: 

  • just under 40% of schemes have some form of non-cash security from the sponsor, usually in the form of parental guarantees 
  • almost 80% of schemes already have, or are considering, a long-term de-risking strategy
  • schemes show a wide range of ultimate goals, with over 30% targeting buy-out with an insurance company. 

Dealing with volatility 

Pension deficits continue to be volatile. According to the Skyval Pensions Index, launched in conjunction with this year's survey, deficits across just FTSE 100 pension schemes varied by nearly £50 billion since the start of 2015. 

While trustees and sponsors should take the long view when it comes to sorting out the financing challenges of their pension schemes, the current fast-moving environment can make decision-making difficult. Businesses really need to understand the underlying economics of their scheme and how its obligations vary over the long term, while trustees should understand how this may affect them.

There are a range of options available to businesses and trustees to deal with stubborn pension deficits, such as extending recovering periods or using non-cash solutions. Businesses facing negotiations with trustees in the near future should engage early in these conversations for the best results. 

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