International Groups with UK Subsidiaries
Pension Funding Constraints on Investments
Over a long period, international groups have acquired UK businesses, often as part of expansion and rationalisation programmes. Corporates in manufacturing and basic industries with long histories and material DB pension schemes have fallen into this category.
The potential cost of the schemes was not recognised on acquisition. As pension funding has become a more material factor it has also become a major drag on performance. This in turn leads to uncertainty and can create disincentives to invest in the UK. The concern is that better performance could simply trigger more rapid cash contribution requests.
Balancing statutory obligations in the context of International Groups
As The Pensions Regulator looks to balance protection of the PPF and member benefits with sustainable growth, there is a sub-group of sponsors and their pension schemes which may benefit from a reassessment of options available. This applies particularly where the UK operation has a scheme that is material to it but where the scheme is not substantial from a Group perspective.
Factors to Consider for International Groups with UK Subsidiaries
Against this background, C-Suite Pension Strategies thinks the scale of the issue warrants attention. Looking harder at the options that should be considered by international businesses looking at the approach to financing UK pensions schemes should be considered.
C-Suite believes that the strength of international groups should be impacting more on pension funding. To make this possible, such groups should provide third party guarantees of a level of funding. This means that the trustees of the UK schemes and its advisors can tap into the credit status of the Group without having to make the credit appraisal themselves. They know, however, that a fall-back position exists.
The guarantees mean the investment strategy of the UK scheme can be reset to provide steady, long-term, balanced returns. It also means that the actuary can look at the levels of prudence required in actuarial assumptions.
To support the approach, C-Suite combines key threads:
International groups are ready to do the right thing. Provide the framework to look after pensioners and invest in the future.
International groups are unlikely to be advised to provide Section 75 guarantees taking on liabilities directly which third-parties set and can reset. They can, however, provide from established financial capacity, guarantees through third-parties of funding to self-sufficiency. The impact on pension contribution requirements shorter term and the balance with R&D and capital expenditure can then be reassessed by the Group. It provides an approach by which TPR can make progress against all its statutory obligations.