Little Progress Made On Defined Benefit Pension Deficits

http://www.ft.com/cms/s/0/1efb8178-dbef-11e2-8853-00144feab7de.html#ixzz2XEbfdZZ1 By Josephine Cumbo The UK’s biggest companies have made little progress in cutting pension deficits, prompting calls for them to find new ways of reducing scheme liabilities. Research by PwC, the professional services group, found that FTSE 350 companies’ ability to support their defined benefit, or final salary, pension scheme promises remained far below that of 2007, before the recession. A PwC index, which tracks the overall level of support provided to defined benefit schemes out of a possible score of 100, now stood at 75, only a one-point improvement since June 2012. The current level of 75 was well below the 88 achieved pre-recession, said PwC. If a level of more than 90 is achieved over the longer term, this would indicate that companies’ legacy defined benefit pension issues were under more control. “Companies sponsoring DB pension schemes need to work harder to find returns in this new economic environment,” said Jeremy May, pensions partner at PwC. “This includes looking to non-traditional asset classes to achieve the required return, while meeting the schemes’ cash requirements over an appropriate timeframe. “Companies also need to be prepared to explore a wider range of ideas, such as longevity hedging, asset swapping and cash flow buy-ins to meet the schemes’ needs.” Pension scheme sponsors were not making the most of the flexibility in assessing funding status and setting recovery plans, “meaning that often too much money is tied up in overly prudent assessments of deficits”, added PwC. The analysis comes two months after the Pension Protection Fund gave its clearest signal yet to trustees to take a more lenient approach with companies struggling to plug their deficits. In its annual guidance, the PPF, which pays the pensions of defined benefit scheme members when their employer has gone bust, said that, where there are significant affordability issues, trustees may need to consider whether it is appropriate to agree lower contributions. This may also include a longer recovery plan, it said. The analysis comes as private sector schemes are starting to benefit from an upturn in the value of assets that underpin pension scheme funding. Last month, the combined deficit for 6,316 private sector schemes fell by £71bn to £185.5bn at the end of May 2013, largely due to a rise in gilt yields. Pension scheme deficits soared to record highs last year as a result of falling gilt yields, driven down by the Bank of England’s quantitative easing policy. Taylor Scott International