ECONOMIC OUTLOOK | Pensions
UK pension liabilities, UK company contributions and UK revenue as a proportion of the corresponding global numbers
35%
30%
25%
DB LIABILITIES
20%
15%
10%
5%
REVENUE
0%
measures such as Guaranteed Minimum
Pension – so called GMP – equalisation
could be scrapped.
However, in practice our expectation
is that the regulatory status quo is likely
to be carried over into the post-Brexit
landscape. Judging by the content of the
recent Green Paper, there is no immediate
prospect of the current regime being
weakened materially.
Economically, the fall in the value
of sterling could mean that European
parents are better positioned to support
their UK schemes in the immediate
term. De-risking exercises or upfront
costs for liability management projects
could be relatively cheaper than before.
There is already a mismatch between
earnings and pension contributions for
UK subsidiaries, so it may be possible
for parent companies to commit further
resources to support UK schemes.
The longer-term outlook remains
uncertain – ultimately, a healthy economy
should ensure that companies remain
robust and in a position to commit
resources to the DB scheme. Any negative
impact on the UK economy will threaten
this position. Further bouts of quantitative
easing could ensure interest rates remain
lower for longer, which will be unwelcome
for unmatched schemes – as we have
seen in the analysis above, this will
include many of the schemes supported
by European sponsors.
Another consequence will be the
impact of administering cross-border
schemes. Untangling these problems will
36
DB
CONTRIBUTIONS
DIRECTOR OF FINANCE
be neither straightforward nor cheap.
Despite the numerous risks, there are
measures which UK sponsors can take to
lessen the impact of a DB scheme on their
business.
TACKLING DB COSTS AND RISKS –
SHORT TERM
The short-term costs of DB obligations
may appear fixed to a large extent –
however, there may still be considerable
scope for employers to lessen the impact
of these costs.
Accounting assumptions contain a
degree of flexibility and sponsors should
be satisfied that they are taking account of
this in preparing their year-end disclosures.
There may be ‘quick wins’ relating to
member options – e.g. ensuring a more
realistic allowance for cash commutation
than is reflected in the scheme funding
basis. An allowance for transfer options
might also be justified. In addition, the
‘best estimate’ nature of the accounting
basis can enable appropriate tweaking of
inflation or longevity assumptions.
The cash committed to DB schemes
will depend on the scheme funding
arrangement with trustees. As part of the
triennial valuation cycle, sponsors should
be clear on the assumptions underlying
the trustee’s basis. There are some options
to help ease the employer’s position –
allowance for post-valuation experience
or asset outperformance in determining
deficit contributions may make a material
difference to the final agreement.
There may also be scope to reduce
short-term expenses, such as the annual
PPF levy. Those firms with overseas
parents should make sure the Experian
score of the UK company makes allowance
for any relevant mortgage certifications
that could reduce the size of the levy
reflecting the lower risk these schemes
pose. Other options can be explored such
as contingent assets from the overseas
parent, which may lead to substantial levy
savings over a number of years.
LONGER-TERM SOLUTIONS
The long-term cost of a DB scheme will
ultimately depend on scheme experience.
For sponsors looking to lessen this cost,
there are no easy options. For companies
with substantial equity allocations who
are looking for asset returns to do much of
the work, this will entail a substantial risk
for the European parent that returns do
not materialise.
The de-risking market offers a method
of transferring risks to insurers. In addition,
a greater emphasis on pension flexibilities
offers opportunities for members to
take their benefits elsewhere. Flexible
retirement options and enhanced transfer
values enable risk to be transferred away
from the scheme and sponsor, sometimes
with an expected reduction in cost over
the long-run as well.
The options available will entail upfront
costs to varying degrees. However, for
overseas parents the weakened level of
sterling may facilitate this process and
allow them to tackle their UK pension
obligations and reduce long-term risks. Q
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