Our latest Pensions Support Index ("PSI") shows that FTSE350 companies’ ability to support their defined benefit pension schemes has dramatically improved over the past six months and is close to reaching pre-recession levels.
The PSI has shown a 7 point increase over the second half of 2013 to 83 (out of a possible score of 100), which has been due to the combination of improved company performance and a decrease in the size of pension scheme deficits, driven by higher gilt yields.
This provides companies with the opportunity to consider how employer covenant – being a measure of the employer’s ability to meet its obligations to its pension scheme - can be factored into managing their scheme. This is central the Pensions Regulator’s new code of practice, which focuses on establishing the link between employer covenant, funding and investment strategy.
I am delighted to introduce our fifth pension support index which is an index of the ability of the FTSE 350 to support their pension promise.
Our index which takes into account the size of pension scheme deficits and the financial strength of companies has shown a 7 point improvement over the second half of 2013 reaching a score of 83 which is the biggest improvement in the score since 2009.
The increase in the score is due to the combination of improved company performance and a decrease in the size of pension scheme deficits, driven by higher gilt yields.
This improvement in the score is an opportunity for companies to understand how their improved covenant position can be factored in when managing their pension scheme.
The Pensions Regulator’s recent code of practice is particularly important in this regard where integrated risk management puts the employer covenant at the heart of the pension scheme funding process.
Those companies with stronger scores will be able to justify taking more investment risk in their pension scheme which in turn can lead to lower pension scheme deficits and a reduction in the level of cash contributions required to be paid to the scheme.
However, the improvement in the score is not universal - 10% of companies continue to have a score of less than 50.
With the recent uptick in M&A activity understanding where you are relative to your peers is important for companies and trustees.
Trustees of pensions schemes with strong scores will want to protect this in a transaction. While those companies with weaker scores may find their pension scheme holding back any M&A activity.
The recent changes to the PPF levy are also important for companies and trustees to understand; those companies with weaker scores are likely to have a higher levy and should be looking for ways to mitigate it.
Do you know how strong your Pension Scheme Employer Covenant is relative to your peers and what this means for you? If you would like to know more please contact either myself or one of the team.