UK DB Plan Sponsors to Pay Out Over £100bn in Three Years

14 May 2012 (PLANSPONSOREurope.com) – The trustees of defined benefit pension funds could receive more than £100 billion in deficit reduction payments from their corporate sponsors over the next three years, or 13% of UK corporate cash holdings, according to a survey.  

The survey, “The future of Pension Schemes 2012”, is the third annual survey of pension fund trustees carried out by Pension Corporation, a leading provider of risk management solutions to defined benefit pension funds. The survey was taken of more than 170 trustees and pension professionals, representing aggregate liabilities of at least £50 billion 

 Key findings of the survey include: 

-         46% of trustees expect funding levels to be worse than at the last valuation  

-         37% of trustees expect to negotiate an increase in sponsor contributions with 20% of them seeking increased payments of more than 10% 

-         22% see their corporate sponsor as weaker than at the last valuation 

-         29% expect to see lower asset returns in the future 

-         41% of trustees view inflation as only a minor concern  

-         53% of trustees have taken no steps to reduce longevity, inflation and investment risk exposure  

These key findings have highlighted three major issues, which need action to address the risk of members receiving less than their promised benefits: 

Over the past three years – since the last major round of Triennial Valuations – pension fund trustees have received more than £80 billion in deficit reduction payments2. Trustees and employers will also have been planning on asset outperformance helping closing deficits, possibly by £30 billion3 over the same three year period. In reality, deficits don’t appear to have reduced, putting pension plans some £110bn behind their targets. What this means is that employer contributions have mostly been used to compensate for further underperformance of assets against liabilities, with little progress being made to reduce deficits.  

 With more trustees asking for big increases, the amount required from sponsors may jump to almost £100 billion over the next three years, or 13% of UK corporate cash holdings. UK plc has been swimming hard upstream, with lots of effort being expended, but not making any real progress against the powerful deficit current.