Boards should respond positively to the Government’s recent initiatives on pension funding. They should, however, be aware that pension trustees have the remit to cut across their dividend, leverage and transaction plans. The Pension White Paper and the Consultation on a stronger regulator shows there will be no let up until a pension scheme is financially self-standing. With fines and criminal charges as threats, financial and reputational risks need reassessment as part of good corporate governance.
The accounting consequences for balance sheets and profit and loss accounts of higher funding targets could prove significant for some corporates.
Responses should be decisive. Muddle through or ignore can no longer be the Board’s approach. Move to a defensible position - from there the Board can again look at the wider picture.
To achieve it Boards need to allocate financial capacity to provide third party, investment grade back up to their covenant. This is to cover the gap between assets held today and the value of assets needed to reach self-standing status. The gap is often large but bridgeable given the sponsor’s financial capacity. Unless the cover is rolled forward, it becomes payable.
The Board covers the key contingent risk. Trustees and actuaries can then look themselves more positively at the journey ahead. The aim should be to set and keep a solid, long term investment strategy without excessive further de-risking. That means more investment returns and less company cash contributions to make up any funding gap. How much prudence do they want in their assumptions and how much cash do they need now? All stakeholders benefit.
“Government action can trigger a positive reaction with sponsors allocating contingent resources to deal with funding gaps. Then investment returns not company cash can provide plan A to achieve self-sufficiency. Act decisively, move to a defensible position and all stakeholders benefit”. William McGrath, Chief Executive, C-Suite Pension Strategies