90% of UK companies concerned about impact of pension scheme on their business - 4th annual PwC Pensions Survey

Published at 10:06 AM on 09 February 2009

With cash in short supply and most companies needing to renegotiate finance facilities, almost all (90%) UK companies with a defined benefit (DB) pension scheme are worried about the impact of their pension scheme on their business.

98 companies (including 29 FTSE100 organisations) participated in the 4th annual PricewaterhouseCoopers Pensions Survey, the results of which will be launched at the forthcoming PwC pensions conference. The event will be attended by 450 employers and trustees in the presence of Rosie Winterton, the Pensions Minister.

The findings show companies fear that their scheme trustees will look to increase cash funding at a time when companies can least afford to, driven by trustee perceptions of the financial health of UK businesses together with misinterpretation of the Pensions Regulator’s stance on scheme funding, Accordingly, companies with defined benefits pension schemes intend to take greater control than previously of pension funding negotiations with trustees. At the same time, there is a huge increase in companies’ desire to reduce or remove their pension risks despite the potential constraints - which include cost, lack of cash and insufficient capacity from insurance providers to which risk can be transferred.

Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers LLP, commented:

“UK businesses are taking unprecedented actions to tackle their defined benefit pension commitments and risks.”

Key findings include:

  • 90% of organisations are concerned about the risks their pension scheme poses to the business yet 18% say they do not fully understand the impact their pension scheme has on the wider business.
  • 34% intend to take greater control of scheme funding negotiation processes with pension trustees
  • 30% want to use contingent assets to reduce cash commitments
  • Renewed determination to reduce exposure to pension risks through numerous risk-reduction strategies:

Benefits redesign: 45% intend doing; 14% already have

Interest rate hedging: 38% intend using; 18% already do

Inflation hedging: 38% intend using; 15% already do

Buy-out: 39% intend using; 1% already have

Buy-in: 40% intend doing; 1% already have

Enhanced transfer values – 33% intend using; 4% already have

Longevity hedging – 34% intend using; 3% already using

Incentivising pensioners to give up future increases – 13% intend using; 5% already have

  • Increased desire to end DB provision for existing employees – 17% intend to close their pension schemes to future accrual for existing employees. 80% have closed existing DB schemes to new employees.
  • 81% of respondents are concerned about the level of cash commitments to their UK defined benefits pension schemes; 81% are concerned about Pension Regulator’s stance on scheme funding.*

Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers LLP, commented:

“The pension scheme is the largest creditor for many UK businesses and its potential impact on a business’ robustness and even survival cannot be ignored. With the cost of capital soaring and a paucity of available debt refinancing, it is essential companies address their UK pensions commitments as part of their overall need to restructure, renew or renegotiate their finance facilities.

“Companies increasingly recognise they need to run their pension schemes as they would any other part of the business, which means ensuring appropriate and quality management of cash, risks, costs and value. The greatest evidence of this is the increased determination of employers to take earlier and more assertive control of scheme funding negotiations with trustees, together with increasing appetite for risk-reduction strategies – from liability buyouts to longevity hedging.”

While the Pensions Regulator’s stance on scheme funding is a concern for 80% of respondents, Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers LLP, commented:

“The best security for a pension scheme is having a strong sponsoring business – and the Regulator has said this repeatedly. It has also confirmed that trustees should not make demands on employers that could lead to the demise or weakening of the sponsoring business. It’s not easy being a trustee right now and employers need to engage trustees openly and early in the funding negotiation process to explain the company’s objectives and constraints - including covenant strength and cash availability. Unnecessary or damagingly large trustee demands are usually made when an employer manages negotiations poorly.

“Accounting issues add a further layer of complexity to funding negotiations as we are seeing a divergence of up to £300bn in the total liabilities of UK pension schemes calculated on a scheme-funding basis compared with the lower liabilities arrived at under accounting rules.”

Appetite for reducing pensions risk

Some 90% of organisations are concerned about the risks their pension scheme poses to the business yet 18% say they do not fully understand the impact their pension scheme has on the wider business.

Marc Hommel, partner and UK pensions leader, PricewaterhouseCoopers LLP, commented:

“Many UK businesses have made large cash injections into their UK pension schemes in recent years and yet, due to market turmoil, funding deficits are very much back on the agenda. This is because cash has been thrown at the problem without removing the underlying risks. Companies need to look at the risks their pension schemes pose to the sponsor’s business, including the potential impact on the balance sheet, profit and loss, credit rating, cashflows and dividends.

“The biggest barriers to risk-reduction at the moment are cost, the availability of short-term cash and limited capacity among the insurance providers. While almost half of companies are considering buy-out, it is not always the right solution – alternatives may be cheaper or more effective.”

Of the companies surveyed, 27% of companies say they would consider buying-out within five years and a further 19% over a longer timeframe.

 

ENDS


Notes to Editors:

1. *These two figures have been released previously. 


For more information contact:

Lydia Ruffles
Financial Services, PR Manager, PwC 
Tel:+44 (0)20 7212 1798 
Mobile:07966 319 780 
 

Marc Hommel
Partner, PricewaterhouseCoopers LLP 
Tel:+44 (0)20 7804 6936 
Mobile:+44 (0)7801 767373 

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