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WAKE-UP CALL FOR COMPANIES AS EMPLOYEE PENSION SCHEMES FACE THE “END GAME”

New research from Deloitte, the leading business advisory firm, has found that pension trustees are often content to rely on the protection afforded by employers over the long term, rather than taking strategic decisions to manage risks.

This is in spite of a high degree of uncertainty surrounding the future financial position of some of the UK‘s largest employee pension schemes.

Trustees have day-to-day responsibility for the management of an employee pension scheme, but it is the sponsoring company which has ultimate responsibility for the financial risk.

Mark Hill, a partner in the Bristol office of Deloitte, who acts for many middle market companies in the region, said: “There are a number of ways that trustees can make an early settlement of their pension scheme liabilities.

“These include insurance company buy-outs or giving members the option to transfer their pensions to a new pension fund. There is a growing market for pension buy-outs and in recent months we have seen deals being made by P&O, Emap and Rank to settle their pension liabilities early.

“However, our research reveals that the vast majority of trustees are not actively considering these options. The “End Game” report makes clear that the risk presented by pension schemes is unlikely to improve over time so it is up to companies to take the initiative and drive forward solutions.”

Survey of Pension Trustees

Deloitte undertook a survey of trustees of pension schemes with a combined value of more than £37 billion and 600,000 members, to explore their views on the risks associated with the schemes that they manage.

The key findings were:

• Two-thirds of trustees are not actively considering their approach to the final settlement of their scheme‘s liabilities.
• The main reason (83 per cent) given by trustees for not considering final settlement at any point in the future is the fact their schemes are still open to accrual for existing members, even if not open for new members.
• Some 60 per cent do not expect to use, or see the sponsoring employer use, any other method to settle pension scheme liabilities other than usual pension benefit payments. Only 28 per cent believe any form of buy-out might take place in the future for their scheme.
• Investment risk, inflation, improving mortality rates and the employer covenant were identified as the four top risks that would be managed if a buy-out policy were adopted.

• Almost three-quarters (73 per cent) of trustees believed that they should not impose an unreasonable cost burden on the employer through instigating a buy-out of pension scheme liabilities. This implies that trustees are unlikely to drive early buy-outs. 

Risks and Attractiveness of Pension Buy-Outs may not Improve over Time

The greatest risks to pension schemes identified by pension trustees were investment performance, inflation, changing mortality rates and the ability of employers to meet their obligations. These risks are forecast by Deloitte to present a potentially significant risk to the value of the schemes and the employer. Deloitte also found that it is unlikely that the attractiveness of a buy-out will naturally improve over a ten-year time period for a typical pension scheme, due its very long-term nature.

 The “End Game” report concludes that in general, trustees are not actively addressing those key financial issues or considering an eventual “end game” and the final settlement of pension scheme liabilities.

 Pension Schemes as Risky Financial Liability

 As they continue their progression from core employee benefit to complex and risky financial liability, employee pension schemes pose significant risks and little upside opportunity for the companies that operate them. Deloitte believes means companies and pension scheme trustees will need to consider the final settlement of pension scheme liabilities.

Mark Hill said: “There is a widespread belief amongst trustees that schemes will continue to run for the long term and that pensions will be paid out over time. Deloitte believes that this will not be the case with early settlement for a significant proportion of schemes via a number of different routes. Companies will need to consider and drive forward ‘end game strategies‘ if they wish to control risks most efficiently.”

ENDS             12th June 2008

For further information please contact Neil Fraser, Sturgess Van Damme, on 01275 349011 or email neil@sturgessvandamme.co.uk