The use of new strategies to reduce or rid balance sheets of defined benefit (DB) pension liabilities is accelerating. The trend points towards an uncertain future for pensions provision, says Jeremy May, pensions partner at PricewaterhouseCoopers LLP in the Midlands.
The latest PricewaterhouseCoopers Pensions Survey, which tracks the opinions of pension decision makers in 86 UK organisations, found an interesting disconnect between the clear exodus from DB provision and the increasing importance of pensions in attracting and keeping the people organisations need to succeed.
Ultimately, despite the clear exodus from defined benefit provision, pensions play a critical role in attracting and keeping the top-performing individuals.
The survey found that 16% of participants have now closed their DB scheme to future accrual for existing employees and another 11% expect to do so in the future.
This finding is significant in light of the fact that a year ago all of the respondents’ schemes were still providing accrual to existing members, while six months ago just 3% had ceased to do so.
In the last six months, the number of schemes closing to existing employees has risen by a far from insignificant 13 percentage points.
That companies continue to close their defined benefit schemes to new employees is no surprise, but the trend towards ceasing to provide future accrual of benefits to existing employees shows just how far UKcompanies are prepared to go to address their exposures to defined benefit pension provision.
Interestingly, 88% of respondents report that pensions are equally or more important than three years ago in attracting, retaining and motivating employees.
We’re undoubtedly seeing increasing concern from companies about the volatility of their funding position and the associated impact on their balance sheet and profit and loss – this is particularly true of companies where the scheme liabilities are comparable to the value of the organisation.
News of recently announced buyout transactions, together with growing opportunities to gain economically justifiable terms, is making pension buyouts an increasingly palatable option for companies with defined benefit pension schemes.
The findings also show over a third (35%) of companies are looking to buyout some or all their pension liabilities. This figure reflects an eight percentage point increase from the 27% reported in summer 2007.
One in five (19%) respondents is looking to do so in the next five years compared with one in ten (11%) last year.
As such, companies need to give careful consideration to the needs of all stakeholders, including shareholders, pension trustees and scheme members.
Buying out is a complex process - there is no ‘one size fits all’ solution, but increasing imagination and flexibility in the pensions industry are creating opportunities of mutual benefit.
Many of the existing buyout providers are going to need to raise further capital if they are to write more business to meet growing demand.