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Consultants Call for Calm Amid Deficit Hysteria

Recent company insolvencies have put underfunded pensions in the spotlight, leading scheme trustees to adopt shorter time horizons for deficit reduction plans.

  • By Joe McGrath

Trustees of underfunded defined benefit pensions should give schemes more time to repay deficits and adopt a lower investment risk profile, consultants have argued.

Pension deficits have continued to make headlines across Europe following the collapse of high-profile plan sponsors Carillion, British Home Stores, and the U.K. arm of Toys ‘R’ Us. Meanwhile, the average time-length for DB scheme recovery plans has fallen in recent years. Consultants are concerned this may be detrimental to schemes and put excessive stress on sponsoring employers.

Patrick Bloomfield, a partner at investment consultancy Hymans Robertson, said a “simplistic focus on deficits” is wrongly leading schemes to take on greater levels of investment risk over shorter periods.

“We need to challenge the prevailing sentiment that is it bad to take longer to pay off deficits,” he said. “Longer deficit recovery periods coupled with more measured investment risk usually results in better chance of paying members pensions without pushing employers into financial difficulty.” 

Given that defined benefit pension liabilities extend for decades, Bloomfield said that trying to match these too soon could put too heavy a burden on employer plan sponsors.

[II Deep Dive: U.K. Government to Carillion Trustees: 'Why Didn’t You Ask for Help?']

The Pensions Regulator reported last year that 39 percent of the longest-established schemes had recovery plans of less than five years, while 21 percent had plans lasting between five and 7.5 years and 16 percent had plans of 7.5 to 10 years. Just a quarter had recovery plans of a decade or more.

Martin Hunter, a principal at Punter Southall, acknowledged the downward trend in DB deficit recovery plans. He said it was important that trustees “strike a balance” between what the employer can afford and the needs of the scheme.

According to Hunter, The Pensions Regulator has shown a keen interest in the level of dividends that employers have been paying and comparing that with deficit contributions.

“One solution we have seen is where trustees want a shorter recovery plan and the employer says it can’t pay more, is to use ‘non-cash’ solutions as some kind of security or contingent asset,” he said. “Property is a fairly generic one. If you have a business that has property on its balance sheet, it is tangible for the trustees. It allows the business to pay less into the pension scheme in the short term, and the business can focus on financing any bank debt.”

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