Jonathon Land, Pensions Credit Advisory Leader, introduces the December edition of the FTSE 350 Pensions Support Index and discusses how integrated risk management could be the key to improving the ability of companies to support their pension schemes.
I am delighted to introduce our fourth pension support index which is an index of the ability of the FTSE 350 to support their pension promise.
The index has remained relatively flat over the last six months and has actually only increased by two points to a score of 76 out of a possible score of 100 over the last two years.
This is substantially below the score of 88 which was achieved before the last recession.
At this level there remain a number of companies in the UK where their ability to meet their defined benefit pension promise remains a real concern.
In this environment, Companies, Trustees and the Pensions Regulator are all looking for ways to improve the position of pension schemes without taking additional risk.
This is an area of particular focus in the pension regulators code of practice which has recently been released for consultation.
In the code of practice, they discuss the concept of Integrated Risk Management with a core premise that pension schemes should not be taking excessive risk when looking at the strength of their employer covenant.
Simplistically, this can mean saying ‘how does your employer covenant value compare to the pension scheme deficit?'
There are a number of companies in the Pensions Support Index which do not do well when measured in these terms.
So how should companies deal with this?
In this issue of the Pension Support Index we explore how companies and trustees can adapt their investment strategy to take account of the strengths and weaknesses in their employer covenant.
For example, is it really appropriate to purchase equities in the pension scheme which are in the same sector as their sponsoring employer as this can amount to a doubling up of risk.
What everybody is trying to avoid is pension schemes deficits growing to a level that they can no longer be supported by their sponsoring employer.
By properly understanding the employer covenant and integrating this into the investment strategy, companies and trustees can significantly reduce the risk of this happening.
I hope you enjoy this latest edition of the Pensions Support Index and if you have any comments please do not hesitate to contact me or any member of the PwC pension team.
This edition of the Pensions Support index shows further evidence that FTSE350 companies’ ability to support their defined benefit (DB) pension obligations has stalled and shows little sign of improving in the near future.
The Index, which tracks the overall level of support provided to defined benefit schemes in the FTSE350, now stands at 76 out of a possible score of 100. The Index was improving since the low of 64 in March 2009, but since December 2011 has remained relatively flat and has only improved by two points. There are few signs the situation will recover to anywhere near the 88 level achieved pre-recession in the short term.
To improve the situation pension schemes will need to take a new approach to investment which fully takes into account the combined risks for both the company and the scheme. With the Pensions making an integrated approach to risk management the focus of the new scheme funding code of practice, this edition looks at how this can be achieved.