03 November 2006
Companies will need to continue making large contributions to
their pension schemes to meet higher funding targets, according to
new research by Mercer Human Resource Consulting.
The analysis of over 160 pension schemes by Mercer Human
Resource Consulting shows that trustees completing actuarial
valuations this year are planning to increase their funding targets
by 10% on average, following influential legislation introduced
last year.
Funding targets are also expected to approach, or even exceed,
the pension liabilities shown in company accounts. The average
target is likely to increase from 92% of liabilities under FRS 17
and International Accounting Standards (IAS) to 100% of
liabilities. When taking into account that FRS/IAS targets are
themselves going up because of increasing longevity, the typical
rise in funding target will be as much as 10% since last year.
More than 1 in 5 schemes (21%) are planning to implement funding
targets above the standards set for company accounts, contrary to
some expectations that the Pensions Regulator's "trigger points"
for intervention, set at or below the company accounting level,
would represent a maximum.
The bulk of the increase, equating to around £75bn in total, or
£5,000 per scheme member, is likely to come from sustained
contribution increases over the next 10 years.
The change in funding targets coincides with the coming into
effect of the Statutory Funding Objective under the Pensions Act,
requiring most trustees to renegotiate their scheme funding
strategies with employers. It also demonstrates that employers and
trustees realise they need to think about how they can fund their
schemes sufficiently to ensure members receive their benefits,
without the seemingly continual need for extra contributions.
Tim Keogh, Worldwide Partner at Mercer, commented: "Employers,
as well as trustees, are responding to the new regulations, and
accept they need to continue digging deep into their pockets to pay
off scheme deficits and deliver greater benefit security for
members. The bar has been raised and more stringent targets have
been put in place. More employers are now seeking an exit strategy
for their pension liabilities and recognise that this may involve
greater scheme funding.
"There has been a lot of rhetoric on how schemes have not
adjusted their funding targets to take account of increasing life
expectancy. These results show the vast majority are factoring in
the "medium cohort" increase projections, which are considerably
more stringent than the projections of two or three years ago. But
they are adjusting the standard model to take account of member
demographics like occupation, location and size of pension, in line
with the strong evidence that these are important factors."
Analysis shows the most common time period over which employers
expect to pay off their pension deficits is 10 years - the expected
outcome for 51% of the pension schemes surveyed. Twenty-nine per
cent had recovery plans of 5 to 9 years, while 8% had plans of 1 to
4 years and 4% of under a year. Just 8% of schemes are expected to
take longer than 10 years to pay off their deficit.
Mr Keogh said: "As well as raising their target funding levels,
employers and trustees are reducing the amount of time over which
their scheme deficits are to be paid off. They seem to be listening
to hints by the Pensions Regulator that recovery periods of more
than 10 years are likely to require serious justification."
