Can the FTSE 350 continue to support its Defined Benefit pension obligations?
The Pensions Support Index tracks the ability of FTSE 350 companies with Defined Benefit pension schemes to support their collective pensions obligations.
Until now, most commentary about the risk of Defined Benefit schemes has concentrated on the size of pension scheme deficits. But, while that gives a snapshot of the state of a scheme at a particular point in time, it’s not the critical issue.
The important question isn’t the size of the pension deficit - it’s whether a company (the sponsoring employer to the scheme) has the ability to support its obligations.
Since June 2007, the PSI has fallen almost 25%, indicating the level of support provided to schemes has decreased substantially. The outlook does not look good and the recent trend continues to be downward.
The question of support for pension obligations has become increasingly important in light of recent market conditions. When faced with increasing pension deficits (that in some cases dwarf the value of the company itself) or a deterioration in company performance, options may appear limited. But it is critical to understand the issues at this stage and take action to protect the position before it is too late: it is time to bite the bullet.
The outlook does not look good. The combination of continued low gilt yields, the impact of a potential further downturn in the UK economy, and growing pressure from Europe for pension schemes to be funded on a more prudent basis, represents a potential triple blow for future pension support. This is likely to mean that companies will have to pay more into their pension schemes. Those at the lower end of the Index will be at a higher risk of failure and the future of their pension scheme members’ benefits will be at risk.
In the report, we examine what this will mean for companies, trustees, scheme members and other stakeholders.