Corporate Sponsors Can Reactivate Pension Schemes to Benefit Today’s Employees Alongside Yesterday’s
UK Government has set a challenge for pension schemes to have a greater role in funding of infrastructure and in galvanising investment in new technologies. Businesses are seen as having a poor record on pay and skills. Companies meanwhile are making clearer, positive statements about commitment to the Environmental, Social and Governance agenda and being supportive of employees as part of Section 172 statements in accounts. Against this background, Boards may wish to review their pension strategies.
Many long standing UK companies have final salary defined benefit schemes. Standard strategies are about decommissioning – derisk and transfer to life insurers – as it is seen as a complex, no upside area.
Enabling schemes to run on rather than run away can help all stakeholders. That requires there to be insurance available against the sponsoring scheme failing to meet its obligations because of insolvency.
That insurance may be extended to cover the need for higher than expected contributions. Schemes need a stable, long term investment strategy focussing on low risk, largely fixed income assets. Then they can take the time to see whether the demographic trends of the last decade, which have shown little life expectancy increases, continue or if the rapid improvements actuaries presume do come about.
Short term end game strategies do current employees little good – something that could change if schemes were reactivated. Schemes then have new rules and work on new, lower risk defined contributions bases: As soon as it is clear that old liabilities are covered then a forward looking plan can start up using the surpluses generated over time.
For corporates looking to give substance to initiatives taken to improve employee benefits and bolster their image and brand, here is a prime opportunity. The sums involved can be very large. Well worth a new, more positive minded examination.
With products provided by major financial institutions there are specific proposals available to sponsors and trustees alike.
Pension funding of old Defined Benefit (DB) schemes takes up too much cash for many of today’s businesses and the UK economy. Yet regulatory work and the inspired decision to set up the Pension Protection Fund means we can stop over-solving pension problems.
The Prime Minister’s and the Chancellor’s recent call to investment managers to put more money to work in the UK in infrastructure and technology is right. What is needed is to take time. Run the scheme on and cash flow projections will show most major schemes are OK or better than that. Plan for success while addressing the risk of failure – through risk diversification.
I have had a career in the City and then in traditional businesses with large pension schemes like Aga Rangemaster. Now having spent some years working in the arcane world of pensions are my recommendations for corporates and scheme trustees are:
Reactivation beats decommissioning - running on beats buyout. It is an approach which can benefit all stakeholders. Pensions is a subject on which most people go reluctantly to school. A little swatting up, however, can bring remarkably good results.
Invest the time and money so all harvest the benefits of the DB magic money tree.