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11

Firms 'under growing pressure' to contribute more to pension schemes

Open-access content 26th November 2012

Companies are coming under increasing pressure to pay more into their pension schemes rather than rely on investment returns to meet their obligations to members, PricewaterhouseCoopers said today.

The consultancy's latest Pension support index, shows that the ability of FTSE 350 companies to meet their defined benefit pension obligations has remained flat since the start of the year.

The index, which scores the overall level of support provided to DB schemes out of 100, improved from a March 2009 low of 64 to 74 at the start of 2012 but has since remained unchanged. It current level is far below the 88 out of 100 recorded in early 2007.

According to PwC, the situation reflects a 'new normal' economic environment of low interest rates and investment returns and higher headline inflation rates which mean that, without action, pension scheme liabilities are likely to remain high.

Jonathon Land, pensions credit advisory partner at PwC, said: 'If investment returns remain low, and company earnings do not rise in line with inflation, companies will find they are paying a greater share of those profits towards covering their pension deficit. This will only add further pressure on those companies that are already weak.'

Jeremy May, pensions partner at the consultancy, said addressing this would require schemes and their sponsors to consider a much-wider range of investment options.

'With government bonds offering historically low yields, pension schemes need to challenge their traditional thinking on investment strategy,' he explained. 'This could include reducing government bond holdings and increasing their exposure to well diversified businesses which could provide a better risk return balance or seeking insurance-based transactions that potentially lock in enhanced returns.'

This article appeared in our November 2012 issue of The Actuary.
Click here to view this issue
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Topics:
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