Plan Sponsors May Have to Stump Up More Money to Shore Up Pension Funds
21 August 2012 (PLANSPONSOREurope.com) - Plan sponsors may need to make larger contributions to pension funds as the UK government faces growing demands for intervention on the calculation of discount rates underpinning the valuation of pension scheme liabilities, according to Punter Southall Principal David Cule.
Cule said: “Gilt yields are currently at historic lows but reflect the market view that long-term low-risk returns are also low. This indicates that to provide long-term cash flow streams, such as pensions, you may need larger funds or greater contributions than previously expected.
“Hence the current basis for valuing pension scheme liabilities means deficits appear bigger. The debate at the moment centres on what can be done to ease the impact of this valuation on trustees and employers.
“The regulator has had a number of opportunities, already, to think about changing the rules. But if you take into account the employer covenant, there is scope to come up with a solution. This has reinforced that there’s enough flexibility in the system to find a solution within the existing regulatory framework and amid current economic conditions. If the employer is struggling, there is scope for a longer recovery plan and to take a more prudent view in their assessment of liabilities.
“Employers should be prepared for trustees to request more contribution, but they can also negotiate whether or not they contribute more cash or take an alternative approach, such as looking at contingent assets or other strategies, such as future pay-out periods. I would not advocate changing the current system.”