A new PwC study reveals that FTSE 350 companies’ ability to support their defined benefits (DB) pension obligations is now, on average, only marginally better than at the depths of the recession.
Despite considerable action taken by companies to reduce their DB pension scheme deficits, PwC’s new Pensions Support Index reveals that nearly a third of companies (29%) have a relatively large pension scheme in comparison to the size and profitability of their business. This is up from 18% in the previous quarter. It is also near the 31% levels seen at the depths of the recession.
Jonathon Land, pensions partner at PwC, said:
“Until now, most commentary about the risk of DB schemes has focused on the size of the deficit. While this gives a snapshot of the state of a scheme at a particular point in time, it misses the critical issue of whether companies are able to support their scheme. This is comparable to commenting on the total value of UK mortgages, without understanding the value of the houses they are secured against and the ability of a person to repay their mortgage.
“Despite FTSE 350 companies pouring billions of pounds into their pension schemes over the last few years, their overall ability to support their DB schemes is little better than it was in the depths of the recession.
“While there is clearly a lot of variability across individual cases, another round of quantitative easing and the continuing economy uncertainty means historical pension liabilities look set to continue to be a significant drag on some FTSE 350 companies unless action is taken.”
PwC suggests that companies at both ends of the Index need to take action. Companies at the lowest end may need to enter into discussions with their schemes and in some cases consider a restructuring. Trustees also need to understand how capable the company is of supporting their scheme.
Jeremy May, pensions partner and actuary at PwC, said:
“Those companies who are in a strong position at the higher end of the Index should articulate their strength to trustees as this could lead to credit in the way scheme financing is agreed. This could help free up cash to be invested in the business.
“There are things that companies can do to improve their position, including using contingent assets rather than cash contributions, liability management exercises and using buy-out mechanisms. The message for companies or trustees with relatively large DB schemes is to ensure you understand your position and act now or risk these deficits growing further.”
The Index, which tracks the overall level of support provided to DB schemes out of a possible score of 100, reveals that companies’ ability to support their pension obligations has been worsening since March 2011. The Index had shown a steady improvement since the December 2008 low of 64 to 80 in March 2011. However the triple blow of quantitative easing, continued European economic uncertainty and the prolonged recession has led to the Index dropping 16 points alone since the start of 2011. The Pension Support Index has fallen 25 points from the Index’s high of 88 in June 2007.
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information.