Company pensions are still struggling with deficits despite an improving stock market and new hope for the economy.
New research shows companies are falling short of funding pension schemes and are unlikely to have enough cash to make up huge deficits any time soon.
At the end of November 2013, pension underfunding by the FT350 top companies stood at £102 billion and asset values dropped £3 billion to £563 billion from October 2013, according to figures from benefits company Mercer.
Now, international accounting firm PwC reports that when improving markets should be boosting funds, they seem ‘immune’ from growing and deficits are still unmanageable.
The PwC Pensions Support Index tracks defined benefit pension schemes in the FTSE 350.
Action required
The index is ranked 76 out of a 100, which is an improvement since the low of 64 in March 2009, but the trend since December 2011 has stayed flat and only improved by two points.
The firm says recovery to anywhere near the pre-recession score of 88 is unlikely for many years – indeed some analysts expect little change until at least 2024.
In relative terms, the score means the combined deficit shows FTSE350 pensions are 24% underfunded.
The PwC report also explains companies, trustees and regulators are looking at better ways of managing funds in what seems set to be the normal economic environment for company pensions.
The firm argues that stakeholders should not take a ‘wait and see’ approach to pension investments but should take action now to minimise risk at the same time as seeking better returns on investment.
Joint approach
The worry, added a spokesman, is the massive deficits will act as a ball and chain for company growth as cash needed for funding expansion is diverted to servicing pension obligations.
Jonathon Land, pension credit advisory partner at PwC, said: “Trustees obviously have a duty to do the best for their members, but at the same time this can present a risk to the employer and the pension scheme.
“The pension regulator wants them to take a more considered approach to investment and funding that will lessen the risk financing pensions pose to the financial stability of the companies paying for them.
“Any decisions taken by trustees should consider the risks carefully. They need to work through the agreement with the employer, how much the company can afford to pay and then the best way to invest the money to benefit pension members and the company.”
The message, adds Land, is trustees and companies have to have a more collaborative approach to funding defined benefit schemes that do not threaten to undermine the business that is feeding the pension.
