Time to bite the bullet
Pensions Support Index: employer support for Defined Benefit schemes


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Hello, I am Jonathon Land - a partner in PwC and I head up PwC’s market leading Pension Credit Advisory Practice. I am really excited today to tell you about our new Pension Support Index which measures the ability of the FTSE 350 to support their defined benefit pension obligations.

Pension Credit Advisory or Employer Covenant assessment, as it is often called, is where we measure the ability of Companies to support their pension schemes and give advice to Pension schemes and companies depending on the outcome of this analysis.

We have been giving this advice since 2004 when the pension act and guidance from the Pensions Regulator highlighted the critical importance of this analysis in the way that pension schemes are managed.

Having completed this analysis for a wide range of trustees and companies over the last eight years we were increasingly interested in what was happening to the broader population of pension schemes, not just to our clients. It is with this in mind that we have developed the Pension Support Index.

We see this as important because while there has been considerable industry comment about the size of pension scheme deficits there has been very little about how capable companies are of supporting these deficits.

For those of you not familiar with employer covenant analysis it involves measuring the ability of companies from a Balance Sheet, Profit and Loss and Cash Flow perspective to support their pension scheme. Using a simple analogy it is similar to looking at a person’s mortgage and comparing this to the value of their house do they have positive or negative equity and how does their income compare to the outlays that are required to repay their mortgage over time.

What our survey shows is that despite billions of pounds being poured into pension schemes over the last few years the level of support is little better than it was in the depths of the recession and actually fell 25% between June 2007 and the end of 2011.

This has significant implications for all stakeholders. Please take time to read our publication and find out what it means for you.  We will be updating this index on a regular basis and look forward to an ongoing dialogue with you.

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.