ECONOMIC OUTLOOK | Pensions
UK pension liabilities, UK company contributions and UK revenue as a proportion of the corresponding global numbers 35% 30% 25% 20% 15% 10% 5% 0%
DB LIABILITIES DB CONTRIBUTIONS REVENUE
possibility that unpopular and complex measures such as Guaranteed Minimum Pension – so called GMP – equalisation could be scrapped. However, in practice our expectation is that the regulatory status quo is likely to be carried over into the post-Brexit landscape. Judging by the content of the Green Paper, there is no immediate prospect of the current regime being weakened materially. Economically, the depreciation in the
value of sterling could mean that European parents are better positioned to support their UK schemes in the immediate term. De-risking exercises or upfront costs for liability management projects could be relatively cheaper than before. As we have seen before, there is already a mismatch between earnings and pension contributions for UK subsidiaries, so it may be possible for parent companies to commit further resources to support UK schemes. The longer-term outlook remains
uncertain – ultimately, a healthy economy should ensure that companies remain robust and in a position to commit resources to the DB scheme. Any negative impact on the UK economy will threaten this position. While the base rate has recently been raised, if interest rates remain at relatively low levels for longer, this will be unwelcome for unmatched schemes – as we have seen in the analysis above, this will include many of the schemes supported by European sponsors. Another consequence will be the impact of administering cross-border
32 DIRECTOR OF FINANCE
schemes. Untangling these problems will be neither straightforward nor cheap. Despite the numerous risks, there are
measures which UK sponsors can take to lessen the impact of a DB scheme on their business.
TACKLING DB COSTS AND RISKS – SHORT TERM The short-term costs of DB obligations may appear fixed to a large extent – however, there may still be considerable scope for employers to lessen the impact of these costs. Accounting assumptions contain a
degree of flexibility and sponsors should be satisfied that they are taking account of this in preparing their year-end disclosures. There may be ‘quick wins’ relating to member options – e.g. ensuring a more realistic allowance for cash commutation than is reflected in the scheme funding basis. An allowance for transfer options might also be justified. In addition, the ‘best estimate’ nature of the accounting basis can enable appropriate tweaking of inflation or longevity assumptions. The cash committed to DB schemes will depend on the scheme funding arrangement with trustees. As part of the triennial valuation cycle, sponsors should be clear on the assumptions underlying the trustee’s basis. There are some options to help ease the employer’s position – allowance for post-valuation experience or asset outperformance in determining deficit contributions may make a material difference to the final agreement.
There may also be scope to reduce
short-term expenses, such as the annual PPF levy. Those firms with overseas parents should make sure the Experian score of the UK company makes allowance for any relevant mortgage certifications that could reduce the size of the levy reflecting the lower risk these schemes pose. Other options can be explored such as contingent assets from the overseas parent, which may lead to substantial levy savings over a number of years.
LONGER-TERM SOLUTIONS The long-term cost of a DB scheme will ultimately depend on scheme experience. For sponsors looking to lessen this cost, there are no easy options. For companies with substantial equity allocations who are looking for asset returns to do much of the work, this will entail a substantial risk for the European parent that returns do not materialise. The de-risking market offers a method
of transferring risks to insurers. In addition, a greater emphasis on pension flexibilities offers opportunities for members to take their benefits elsewhere. Flexible retirement options and enhanced transfer values enable risk to be transferred away from the scheme and sponsor, sometimes with an expected reduction in cost over the long-run as well. The options available will entail upfront
costs to varying degrees. However, for overseas parents the weakened level of sterling may facilitate this process and allow them to tackle their UK pension obligations and reduce long-term risks. n
dofonline.co.uk
Average UK subsidiary as % of global
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
