Closure is not the only option

The vast majority of UK companies and pensions scheme trustees are seeking alternative solutions to closing their defined benefit (DB) pension schemes, according to new research.

A survey by pensions consultant Hewitt Associates of over 150 UK pension schemes, representing more than £300bn in scheme liabilities, shows that nearly 90 per cent of trustees and sponsors believe deficits will increase at their next valuation.

The impact of the economic recession means the majority of sponsors cannot afford to plug the deficit with spare cash – over half of respondents predicted that the increased deficits will lead to contributions being higher than employers can reasonably afford. However, the research demonstrated that, contrary to expectations, closure is not now the favoured option when dealing with deficits.

Kevin Wesbroom, UK lead, global risk services at Hewitt Associates, said: “Burgeoning pension deficits are presenting trustees and sponsors alike with a considerable challenge, and the potential for conflict. But rather than a battle between trustees and sponsors, a new, realistic and longer-term approach is emerging - one that recognises preserving the company’s financial health is in the best interests of the scheme and its members."

Extending the length of the recovery plan over a longer period of time to assist short-term cash flow is seen by 97 per cent of trustees and 79 per cent of companies as the most affordable way of funding the expected increase in deficit. Actions under consideration, in order of preference, are:

1. Extending the length of the recovery plan over a longer period of time to assist short-term cash flow (79 per cent corporate, 97 per cent trustees)

2. Reducing rates at which the liabilities grow, including options such as keeping the DB plan open but capping pensionable salary increases and using longevity swaps (65 per cent corporate, 63 per cent trustees).

3. Allowing for asset out-performance within the recovery plan (50 per cent corporate, 36 per cent trustees)

4. Alternative financing (38 per cent corporate, 31 per cent trustees)

5. Reducing the level of prudence included in technical provisions (26 per cent corporate, 31 per cent trustees)