Rid us of this pensions millstone, say UK firms

Oct 19 2007 by Nic Paton Print This Article

British companies are not just closing their final salary pension schemes to new employees. Many now want what has become a financial millstone off their balance sheets all together.

More than a quarter of large British companies are considering selling their pension schemes, with a third of those that have already closed them to new entrants desperate to get the liability off their balance sheets.

The study of UK pensions by PricewaterhouseCoopers LLP found companies increasingly looking for an exit strategy.

The long-term trend of defined benefit – often final salary – pensions being replaced with defined contribution schemes that shift all the investment and longevity risks to the employee is continuing and, if anything, gathering pace.

More than a fifth of employers were now also considering selling their pension scheme in the next five years and 16 per cent said they intended to do so over a longer period, said PwC.

Some 20 new companies have been set up in the past two to three years to buy pension scheme liabilities and run them for profit, pointed out Marc Hommel, partner at PwC.

"We are seeing a surge of interest from employers of all shapes and sizes looking to rid their balance sheets of pension liabilities," he said.

"This is being driven by a feeling of loss of control over pension scheme financing fuelled by recent investment market volatility and, in some cases, overly prudent scheme funding demands from trustees," he added.

The survey of 193 companies (including 45 from the FTSE-100) found that more than half of larger companies and nearly a third of smaller ones were concerned about the prospect of trapped surpluses – or excess money caught within the scheme that cannot be recovered by the employer, thus reducing the company's effective use of capital.

But the survey also made it clear that employers were not intending to get out of the pensions game altogether, simply to change the way they provided pensions.

Nine out of 10 said the importance of pension provision as part of the employment deal had in fact increased or stayed the same.

And more than half said they were looking at future pension policy in the context of overall wealth management for their employees.

More than six out of 10 claimed to be taking into account the fact that people at different stages of their lives value employer pension provision differently.

For example, a younger person may wish to save less into a pension in favour of buying a property.

"Many companies are considering radical change to their pension provision to fit in with their business strategies and changing demands from their workforces but few have actually implemented anything yet," said Hommel.

"We expect to see greater imagination in pension provision in future, with companies introducing new arrangements that give them much better value for the considerable amounts they are spending," he added.

Nearly half expected to make one-off special deficit payments in the next 12 months, while more that four out of 10 expected to pay regular increased cash contributions over the next three years.