UK Companies Make Special Pension Infusions

June 28, 2006 ( - Last year 60% of companies made special pension contributions, above normal or statutory contributions, to help plug their scheme deficits, according to a survey by Mercer Human Resource Consulting and the Association of Corporate Treasurers.

According to a press release, the greatest drivers for these payments were scheme-specific funding requirements (30%), which require companies to contribute to underfunded schemes to reduce their deficits, and general risk mitigation (25%).  Only a few companies made special contributions strictly to reduce their Pension Protection Fund (PPF) levy (7%) or for tax reasons (7%).

According to the survey, 12% of companies undertook a specific financing agreement, such as a loan to fund a special contribution, the release said.

The survey found that even though Mercer has seen increasing interest in the use of derivatives for liability-driven investment strategies and investment de-risking strategies, very few respondents have used derivatives to hedge the investment risks associated with their liabilities. Interest rate and inflation derivative instruments were adopted by 6% and 4% of respondents respectively.

More than half of survey participants (54%) had reviewed their scheme’s mortality assumptions during the last year to take into account increasing longevity, while the remaining said they intend to do so this year. Of those who have already reviewed their assumptions, 60% have strengthened them so that for a typical scheme, liabilities will increase by around 10%.

Last year officials at the UK Pension Protection Fund (PPF) said they will consider special cash contributions made by employers to make up funding deficits in their pension plans when they calculate employer insurance levies (See UK Pension Insurer to Consider Special Pension Contributions ).

CFOs and treasurers in over 100 companies, most of which were in the FTSE 350, participated in the survey. The full survey report will be published in July and copies can be requested from .