Projections in line with the employee benefits standard IAS19 by
Mercer Human Resource
Consulting showed that deficits across the FTSE 350 dropped by 29%, from
£86bn in 2005 to £61bn for 2006 year-end accounts, but investment strategy and
longevity risks still represent major sticking points for companies.
Tim Keogh, worldwide partner at Mercer, predicted a scramble by companies to
pump cash into their schemes before the Pension Protection Fund recalculates its
levy in March.
‘Intentionally or otherwise, the PPF levy will encourage companies that can
fund their pension schemes by borrowing elsewhere to do so. As a result, we may
see a large burst of pension contributions before the end of March when the PPF
levies are recalculated. But, as in previous years, much of this money will come
from financially strong companies with choices, not weak ones with problems.’
While some employers responded to the introduction of PPF levies by
increasing contributions last year, Mercer believed that tax advantages, strong
cashflow and corporate deals have been the major drivers of large funding
payments so far.
Research showed that over the last four years companies have tried to manage
their pension risk by reducing the level of future benefits, either through
cutting existing members’ benefits or closing schemes to new entrants.
Although this action reduced future risks, it did not diminish the legacy
exposure, which comes from a scheme’s investment strategy and the uncertainty
surrounding member longevity.
Last year, differences in longevity forecasts highlighted the disparity that
can exist between major corporates. BT’s pension liabilities would rocket by
£3bn to £41.2bn and more than double its deficit to £5.5bn if the Royal Mail’s
longevity estimates were applied to the telecoms group.
The consultancy believed rising funding levels were good news for pension
scheme members, but the underlying longevity and investment risks remained
significant issues for sponsoring employers.
Mercer highlighted considerable activity in the longevity trading market, but
the transfer was mainly between insurance companies rather than from pension
schemes to insurance companies.
Keogh said: ‘The critical question this year is whether we will see pension
schemes transferring substantial levels of longevity risk.
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