Little progress has been made by companies to reduce the financial burden of their pension obligations as they fail to adapt to the new economy, according to PricewaterhouseCoopers (PwC) analysis.
The ability for FTSE350 companies to support their defined benefit (DB) pension obligations remains fair below per-recession levels, the accountancy firm said.
Lower growth, higher inflation and low interest rates have put companies sponsoring DB schemes under "significant" financial pressure, and as a result, PwC are encouraging companies and trustees to work together to find solutions to help schemes and protect members' benefits.
PwC pensions credit advisory partner Jonathon Land said: "DB pension schemes remain a huge financial burden on many companies' balance sheets and the situation is unlikely to improve without real action from sponsors and trustees.
"The slow economy means pension schemes cannot afford to stand still. Stakeholders will have to be more innovative in tackling their pension issues and safeguarding their members' benefits.
"Those companies that take steps to properly understand the options available to them will place themselves in a better position to help all their stakeholders as well as the pension scheme."
PwC's Pensions Support Index, which tracks the overall level of support provided to DB scheme out of a possible score of 100, now stands at 75 compared to 2007 when it was 88.
The firm noted that the index has been flat since September 2011.
Among other measure, PwC pension partner Jeremy May said that companies need to look at non-traditional asset classes to achieve required return, while meeting the schemes' cash requirements over an appropriate timeframe.
He added that schemes should look into longevity hedging, asset swapping and cash-flow buy-ins to meet schemes' needs.
May said: "Pension scheme sponsors are not making the most of the flexibilities available in assessing the funding status and setting recovery plans, meaning that often too much money is tied up in overly prudent assessments of deficits.
"Smarter investment strategies and techniques for assessing deficits could free up considerable cash for companies, which could instead be deployed to strengthen their businesses and the economy."
PwC also said that if the European Commission had not dropped the funding aspects of the proposed IORP II pensions directive, then this would have reduced the pensions support index to a score of 60, taking the index to a lower point than in March 2009.
PwC pensions credit advisory partner Richard Setchim said: "Our analysis shows how badly the pensions industry and wider economy would have been impacted by the funding aspects of the directive.
"Despite the welcome removal of the funding aspects of the directive, companies and trustees need to be on guard that Solvency II is not still introduced under the guise of governance - in the so-called ORSA provisions. This would require an assessment of a scheme's risks against their available security mechanisms, including sponsor support."
First published 24.06.2013
monique_simpson@wilmington.co.uk
