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09

Companies urge to use cash to de-risk DB schemes

Open-access content 18th September 2013

Companies should ‘actively’ investigate the opportunities that exist in the insurance market and remove as much risk as possible from their defined benefit schemes by using corporate cash reserves, according to Capita

The professional support services firm has urged companies to 'take advantage of [the] improved pension de-risking climate'. Capita said DB pension schemes represent a growing financial risk. 'Companies that have successfully taken some or all of this pension risk off the table are simply more attractive to investors,' the firm said.

In an examination of the balance sheets of FTSE 100 companies, Capita said the gross amount of cash companies were hoarding had increased by £42.2bn - a rise of more than a third - since the full effects of the recession set in. Capita's research found that using cash reserves would help bolster pension scheme finances, making them less risky.  

Justin Damer, commercial director of Capita Asset Services, said: 'The credit crunch was a huge shock for firms used to running lean finances. Companies re-engineered their balance sheets to a more defensive structure as the recession bit, paying off debt and stockpiling cash, diverting the funds from business investment, acquisitions or dividends.' 

'But they have continued to hoard cash even as the economy has gone up through the gears. With the economy back on its feet, the key question is what companies will do with their cash reserves.'

Citing a recent study from tax and advisory firm Grant Thornton, DB pension plan de-risking, Capita said: 'While the natural inclination for shareholders might be the desire to see cash reserves distributed, [the study] found that those companies that de-risked their pension plans benefited from an average increase of 10.2% in their share price.'

Julie Stothard, director of actuarial at Capita added that the costs of de-risking exercises have moved favourably for employers in recent times.

'Companies should be actively asking their trustee boards to revisit de-risking: they may be pleasantly surprised at how the markets have moved,' she said.

'The combination of circumstances certainly lends itself to de-risking exercises and we would advice companies to actively investigate the opportunities that exist in the insurance market to remove as much risk as possible from their defined benefit schemes.'

This article appeared in our September 2013 issue of The Actuary.
Click here to view this issue
Filed in:
09
Topics:
Pensions
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