Solving the corporate pensions conundrum
22 March 2017
John Towner from Legal & General speaks to Business Reporter about the challenges facing defined benefit pension schemes and the options for companies and trustees.
Pensions have once again become headline news. BHS and others serve as stark reminders of how challenging pension schemes have become for the companies that support them. Over the past five years, it’s estimated that UK companies have contributed £75 billion to their final salary pension schemes, while over this same period, the value of their pension liabilities has increased by around 50%. Today there are roughly £2 trillion of UK pension obligations sitting on companies’ balance sheets.
Why are companies struggling to keep their pension promises?
Pension obligations are risky, volatile and are a complex combination of interest rate, inflation, longevity and other investment risks. While pension trustees, sponsoring companies and their advisers have made substantial progress over the past ten years increasing risk management within schemes, they continue to struggle with low interest rates, volatile markets and increasing life expectancies – all of which has led to persistent pension deficits across a multitude of companies. Many finance directors today recognise that their pension liabilities are essentially insurance-like in nature and do not sit naturally on companies’ balance sheets.
A brighter future
Companies, however, should not be put off by the scale of the challenge and have more ways than ever before to tackle their liabilities. From insurance solutions such as buy-ins and buyouts, to self-sufficiency investment strategies, there are many approaches to consider.
Over £30 billion in pension obligations have transferred from UK company balance sheets to insurers over the past three years alone. Under a buyout, the responsibility for paying pensioners transfers to an insurance company. This has three main benefits:
- It enables the trustees to fully settle their pension liabilities
- It improves the security of members’ pensions as they move out of the corporate pensions environment into a regulated insurance regime
- It enables the company to remove a legacy, non-core liability from its balance sheet and free up internal resource to focus on growing its business
Whichever approach you take, we believe success always depends on preparation and careful planning. At Legal & General we work with pension schemes at all stages of their journey and have over the last 30 years guided many pension schemes to a full buyout – often sooner than they initially anticipated.
For further information please contact John Towner on 0203 128 1154 or visit: