Pension funding problems persist
During late 2011, the UK observed significant falls in gilt yields. This reflected the impact of the Bank of England quantative easing programme as well as market concerns over Euro zone sovereign debt, with UK gilts being seen as relatively safe haven. However, as pension scheme liabilities (the “technical provisions”) are typically evaluated using discount rates based on long-term gilt yields plus an agreed margin. This means that there has been a marked fall in the baseline for setting funding discount rates and consequently, combined with poor stock market returns, pension scheme trustees will likely be reporting significant increases in pension scheme deficits.
This is despite the fact that many companies have paid significant contributions over the past few years to address pension deficits. Companies with a cash funding valuation in late 2011 or early 2012 will therefore need to prepare themselves for increased cash contribution demands from trustees.
Deloitte estimate that the aggregate funding deficit for FTSE100 companies have increased by c.£150bn over 2011, to c.£250bn at 31 December 2011, whereas the aggregate accounting deficit is estimated to be c.£90bn at the same date.
How can we help?
Deloitte can support companies through the funding negotiation and in developing a long term strategy to manage their pensions risk, including investment strategy review (e.g. hedging strategies, trigger point switching of asset classes), liability management exercises and transfer of liabilities to an insurer. We also have market leading credentials in asset-backed funding solutions, through our Pension Funding Partnership (or “PFP”). Used appropriately, the PFP can provide a proactive means of immediately funding a significant proportion of deficit whilst preserving cash in the business and improving tax efficiency. This typically works by the employer establishing a limited partnership into which group assets (e.g. property, brand) are transferred. These assets are then leased or licensed back to the group for a market rent or royalty.