Companies sponsoring final salary schemes are being pushed to fund schemes to insurance buy-out levels. Regulators are annexing greater powers to apply pressure; carrying out raids for data and using criminal sanctions. If schemes are to be funded beyond the accounting numbers, the case grows for the liability being on the balance sheet.
Hard cases have resulted in debatable rules. Still, what should Boards do when pension funding eats into their free cash flows?
Much talk is underway about creating consolidated schemes providing ‘annuitisation light’. Yet for those corporates with good cash flows and balance sheets – or with parents that have them – the answer is to use that financial capacity to provide a ‘life insurance’ policy payable in the event of death. Then the investment pool already available can be used to generate sound returns that one day achieve the same end that the Regulator wants, and members expect.
At present, commercial banks and insurers have an interest in becoming involved and are bemused that they are not asked – but the pensions profession has not found a way to use that capability effectively.
A creative, positive Boardroom session on the subject can produce solutions:
Corporates are being dragged, reluctantly and expensively, towards funding the transfer of legacy pension schemes to a level that insurers will take them on and very profitably run them off.
Corporates can get a grip on pension funding and use their financial strength to derisk members’ position if trustees will agree to sound, long-term investment plans. Everyone is a winner.
The mix of governance and financial concerns should finally mean Boards recognise responsibility for decommissioning final salary pension schemes. They should join in with work to manage investments well and consider the interests of past and current employees better.
“Perhaps the real cost of doing the right thing is not so high for soundly financed Groups. Make it possible for market returns, not corporate cash flows, to make the difference” William McGrath, C-Suite Pension Strategies
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