Corporates’ New Pension Funding Dilemmas. Problem: Solution: Action Plan

The Problem Statement

Pension funding is bringing new reputational, governance, finance and accounting problems to Boardrooms.  2018 Government actions and regulatory changes have raised the stakes.

The mix of low interest rates and the derisking of investment returns is recognised as causing issues.  Now, the funding targets set for schemes under the Pension White Paper are to move to self-sufficiency and buyout.  Unless asset returns deliver the extra money, corporates will be paying considerably more in cash than their accounts suggest.

Further, the “Stronger Pensions Regulator” can cut across corporates’ dividends, leverage and transaction plans.  The powers are backed with reprimands, fines and criminal sanctions.  Reputational risks for directors and trustees have increased considerably.  Corporate governance processes will need to give executives clear guidance for the thankless task of reaching agreement with trustees and the Regulator.

With higher financing targets coming, accounting rules will soon catch up and cause balance sheet and profit hits.

The Solution

Corporates can respond positively to the problem and move decisively to a defensible position.  

Provide:

• Third-party, risk-diversifying insurance carved out of the sponsor’s financial capacity.  If it is not maintained the amount becomes payable before the insurance can lapse.  Covering the gap between assets held today and self-sufficiency means the scheme cannot fall into the Pension Protection Fund.

In exchange for:

• An agreed investment strategy that can generate returns to cover the funding gap over time without recourse to the corporate for high cash contributions.
• An agreed framework for actuarial liability calculations as part of an agreed Integrated Risk Management exercise which makes prudence levels more transparent.

The benefit of the higher returns is much greater than the cost of the insurance.

The Action Plan
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C-Suite Pension Strategies has the ideas and the actuarial and insurance sector contacts to make implementation possible