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UK employers are pressing to suspend scheduled pension contributions amounting to tens of millions of pounds after many retirement schemes hit an unexpected surplus.
Investment advisers to FTSE-listed companies with “defined benefit” pensions that pay a guaranteed income based on an employee’s salary and length of service, said employers are increasingly looking to reach agreements with their scheme’s trustees on ending payments to their plans.
Employers and trustees typically agree a funding plan for pension schemes every three years. For the past 15 years most of the UK’s 5,200 DB schemes have typically reported deficits or funding shortfalls due to low interest rates. But the sharp rise in rates over the past year has left most of them with a surplus.
Edd Collins, senior director with WTW, a professional services firm, said he had clients who had reached deals to stop contributions.
“Employers, some very large FTSE-listed companies, are reaching out to trustees and saying: ‘We want to negotiate now and stop paying deficit contributions,’” he said. “They are saying: ‘We don’t think we need them anymore.’”
When calculating the cost of the pension promises, which can run decades into the future, actuaries take into account long-term interest rates. In general as interest rates rise, the scheme’s liabilities fall and vice versa.
In February this year there were 4,459 schemes in surplus, and 776 in deficit compared with two years ago when 2,479 were in surplus and 2,839 in deficit, according to the Pension Protection Fund, the lifeboat scheme.
“Whether the sponsor is FTSE 100 or a small privately owned business, if the pension scheme is now very well funded, there will be pressure to turn off contributions as part of valuation exercises that are currently or about to take place,” said John Dunn, head of pensions funding and transformation at PwC UK, the professional services firm.
“We are seeing this across the market,” he added.
Collins said employers would use cash freed up from the DB schemes for business investment or to fund contributions to other company pension schemes, where staff do not have guaranteed retirement income.
Trustees said employers are now seeking to bring forward the next three yearly check.
“We can definitely see some valuations being brought forward to facilitate a deeper look at the new cash flows,” said Chris Roberts, professional trustee and managing director at Dalriada Trustees.
Stephen Purves, head of risk settlement with XPS Pensions, said ceasing contributions was a “much more common” request and “reasonable thing to do” to avoid overfunding the scheme.
Last week the Pensions Regulator estimated that a quarter of DB plans, or around 1,000, were so well funded they could afford to pay an insurer to take over the scheme’s liabilities, or a deal known as a “buyout”, which would fully remove the scheme from the employer’s hands.
“Most funding agreements do switch off once certain thresholds have been hit and being fully funded on buyout would be one of these,” said Purves.
“In some cases, trustees may be willing to agree to a mechanism whereby contributions restart again in the event of those gains reversing.”
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