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The total deficit for final salary pension plans of all UK companies is currently more than £100bn according to Deloitte. An analysis of current pension deficits and reported earnings by pension actuaries at Deloitte has revealed that, across the whole UK economy, up to 25% of companies may struggle to pay back their current pension deficits over the 10 year period set by the Pensions Regulator.
New funding legislation introduced this year has put pension scheme trustees in a position of greater power when they negotiate future contributions with the company. The new funding requirements are likely to require companies to pay off deficits over no more than 10 years.
David Robbins, a Pensions Partner at Deloitte comments: “The most important asset of a pension scheme is the company itself. Pension scheme trustees should consider the financial status of their sponsoring company in the same way that a lender considers an individuals ability to repay a mortgage. ”
The weakest employers may also be the hardest hit. In these cases, pension trustees may require funds to be invested in assets which better match the liabilities of the pension scheme to reduce the volatility of the pension deficit and the need for an immediate cash call on the employer. However, Deloitte expects the cost of funding the pension deficit will then increase because of the lower expected investment return on matching assets such as government bonds compared to equities.
Angus Martin, a Corporate Finance Partner at Deloitte comments: “Pension deficits have become increasingly high profile over the last year, leading to greater scrutiny from investors and employees alike. £100bn is a big figure, yet the real issue to understand is how much of the deficit is affordable. Our analysis shows that, despite increased contributions from companies worth more than £20bn over the past year, 25% of company deficits remain difficult to afford.
“The question trustees should be asking is ‘Is your company good for the deficit?’ In some companies the deficit is so large that the pension scheme trustees effectively own the company. Without a robust funding plan, pension scheme trustees have the potential to push firms into insolvency. This is not in the interest of trustees, scheme members or companies. Trustees have a duty to their members to work with the organisation to ensure that this problem is overcome and any deficit is fully funded over a reasonable timescale.”
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Notes to Editors
About Deloitte Total Reward and Benefits Limited
Deloitte Total Reward and Benefits Limited is a multi-disciplinary consulting group comprising 100 actuaries and other pensions and benefits specialists, which focuses on delivering high quality pensions advice to employers and scheme trustees. Deloitte Total Reward and Benefits Limited is authorised and regulated by the Financial Services Authority.
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In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and people excel. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.
