Putting Pension Cash Contributions in Context

International Groups : UK Subsidiaries

Pensioning Off UK Industries
 

• Highly rated International Groups with UK subsidiaries are paying large cash sums and substantial proportions of UK profits into legacy pension schemes.
• Company accounts can underemphasize the impact of pension cash contributions as they are not directly charged to the profit and loss account.  Actuarial not accounting calculations set the cash cost.  Group and investor cash flow valuations, however, incorporate the full impact.
• Tightened funding requirements will push cash contributions up as schemes fund beyond current actuarial deficit calculations.  The related regulatory framework adds corporate governance and reputation risks at Group and UK levels.
• The attractions of the UK for investment reduce if additional profits only accelerate pension contributions.  Sustainable growth of UK operations comes into question.  Yet without investment the UK operations wither away.  They become the high-cost producer and are at risk from rationalisation programmes by their parents.
• The UK tyre and car industries are examples of sectors where pension funding encourages Groups to drive away.
• Doubts are widespread amongst actuarial consultants and asset managers about current strategies.

 
There is a solution
 
The answer is for the Group to ‘get stuck in’ and provide a structure under which it, its subsidiaries and members of the scheme are all properly protected.

This is achieved by the Group agreeing to keep in place guarantees from financial institutions which diversify any risk to the scheme.  They cover the gap between the assets held today and the amount needed for the scheme to be self-financing.  The agreed guaranteed framework remains in place until that is achieved.

In exchange, the scheme maintains an investment strategy which has less derisking and requires lower cash contributions.
 
All stakeholders benefit

For more information contact:
 
William McGrath
Chief Executive C-Suite Pension Strategies
Former CEO Aga Rangemaster
E: [email protected]
 
Roger Higgins
C-Suite Partner
Former Partner and Actuary with KPMG
E: [email protected]

Alan Baker
C-Suite Partner
Former DB Risk Leader at Mercer
E: [email protected]