Companies are overpaying £9bn a year into pension schemes, reveals Skyval Pensions Index analysis

Published at 00:01 AM on 08 July 2014

Analysis by PwC's Skyval Pensions Index suggests that companies are overpaying into their pension schemes by £9bn a year because they are not taking advantage of improving market conditions. Across corporate UK, pension scheme balance sheets may look £70bn worse off than they really are.

PwC's new Skyval Pensions Index, which tracks the health of defined benefit schemes across the FTSE100 on a real-time basis using the Skyval platform, shows that aggregate funding ratios of pension schemes with valuation dates of 31 December 2012 improved by 9%, from 79% to 88%, over the following year and deficits were down by a third by the time the valuations were required to be finalised in March 2014. This improvement was due to changing market conditions, particularly rising nominal interest rates and gains in return-seeking assets.

Despite pension scheme financing rules allowing credit to be taken for improvements in market conditions since the effective date of the valuation, not enough pension schemes are taking advantage of this. A PwC survey of pension scheme funding practices reveals that only a quarter of respondents were planning to apply this concession. The survey also found that only one in 10 of respondents have access to real-time pension funding update information, which may explain why the proportion of schemes taking account of current market conditions in their funding agreements is relatively low.

A more accurate picture of a scheme’s deficit will allow companies to pay the cash necessary to support the scheme prudently rather than target excessive reserves, and allow trustees the right information to remove unnecessary risk from the pension scheme at the most opportune times. This all comes together to allow the scheme to run more efficiently to better secure members' pensions.

Raj Mody, head of pensions at PwC, said:

“Pension scheme funding is a one-way valve - once money is in the pension fund it is unlikely to ever be returned, even if it surpasses requirements. It is surprising that more companies with defined benefit pension schemes are not taking advantage of the improved market conditions to better manage their cash commitments. Cash is being unnecessarily tied up in pension schemes when it could be reinvested in the business to support growth.

“Pension funding negotiations should not be a one-time event. Monitoring funding in real-time to take account of market movements will allow companies to only pay the cash needed to support the scheme and arms trustees with more useful information. A more accurate picture of the pension scheme’s deficits will leave trustees safe in the knowledge that they can afford to remove risk from the pension scheme, which will ultimately benefit the scheme and employer.

"A lack of real time accurate information could result in flawed management actions on both sides of the pension scheme table – for employers and for trustees."

ENDS

Notes to Editors:

  1. For further commentary on market issues, visit our pensions blog: pwc.blogs.com/pensions
  2. Skyval is a web-based pensions platform which sponsors, trustees and their advisers can use as a single tool to analyse the impact of changing pensions regulations and market developments. It is now being deployed by over £80bn worth of pension schemes. For more information please visit www.skyval.com

PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

2014 PricewaterhouseCoopers. All rights reserved.


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PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. © 2016 PwC. All rights reserved

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