Scramble to boost pension schemes ahead of PPF levy

Scramble to boost pension schemes ahead of PPF levy

Corporates are preparing to bolster their pension schemes before a key decision is taken by the Pension Protection Fund later this year

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.

Share

Subscribe to get your daily business insights

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata
Professional Services

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

3y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

3y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine
Accounting Firms

Turn Accounts Payable into a value-engine

3y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021
Making Tax Digital

Digital Links: A guide to MTD in 2021

3y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource