The collapse in stock market values over the last few years has brought defined benefit (DB) pension schemes and the risks inherent in them under much scrutiny by corporates and their treasurers. Although improved market conditions may have eased many of these concerns, and statistics indicate the UK’s pension fund deficit is narrowing – down at £50bn today compared to £55bn in 2003 for the FTSE 100 (Lane Clark and Peacock) – now is clearly not a time to be complacent. Demographic factors, such as an ageing population and a declining birth rate will have a significant impact on the UK’s pensions economy (see page 15). Moreover, the movement towards closing DB schemes to new members, coupled with these dynamics, could also bear heavily on corporates’ abilities to meet their future pension commitments.
The government is trying to address the issue of corporate underfunding of pension schemes with the Pension Protection Fund (PPF). This is a key element of the Pensions Bill, which entered the House of Commons last month and is expected to become legislation next year. It will offer partial compensation to DB scheme members who are shortchanged in the event their employers go bankrupt. It will require all companies with final salary schemes to make contributions, taking the form of a levy per scheme member in the first year, and a fee based on the degree of risk that a company’s individual pension scheme presents from the second year onwards.
Concerns have been voiced about the PPF’s ability to meet DB pension scheme liabilities. Can the government alone provide a viable solution to underfunding? Or should corporates themselves take responsibility for pension fund solvency, with treasurers taking a lead in understanding the extent of their pension fund liabilities?
There are certainly a number of options open to companies today: they can do nothing and rely on future stock market performance to resolve the issue of pension fund deficits, or make annual contributions into their corporate schemes. Another way forward – and much more novel – is to tackle the problem head-on by meeting deficits with funds raised in the capital markets.
Last month, Scottish & Newcastle did this, using cash and existing bank facilities to inject £200m into its corporate pension scheme, which had revealed a deficit of £424m on actuarial evaluation in 2003. This followed Marks & Spencer’s successful £400m public issue in March, intended solely for its DB pension scheme, which had revealed a £585m funding shortfall. The move was intended to exemplify the company’s commitment to its DB scheme and capitalise on current interest rates and strong demand in the corporate bond markets. It also enabled M&S to benefit from favourable tax treatment.
Not surprisingly, the issue witnessed strong market support, with the company also applauded for recognising its pensions liability and becoming more transparent in its accounting. Is this an example that others can follow?
LIZ SALECKA
Editor