Increasing life expectancy, new accounting standards, regulatory changes and the continued volatility surrounding scheme deficits have all contributed to make Defined Benefit pension schemes a major corporate headache for many companies.

 

 

As a result many employers are looking at ways of reducing the exposure to risk that the pension scheme poses, ranging from full scheme closure to a partial buy out of their scheme liabilities, or to a more innovative risk management solution. Risk mitigation is the norm now that Financial Directors are faced with the pension scheme deficit appearing as a liability on the company’s balance sheet.

The role of pension scheme trustee has also drastically changed, and faced with more onerous responsibilities of negotiating on employer contributions and deficit recovery plans as well as evaluation of the scheme covenant, they are less reluctant to assume the role. This is another problem for the employer who is often unable to get the support from within, or who has to consider a potential conflict of interests where a Director takes on the duties of trustee.

Running a pension scheme is a complicated, time consuming and often expensive process, however it is possible to make savings or to drastically change the risks posed by the scheme. Employers need to have clear objectives and to understand the benefits of all of the options open to them, whether this is continuation or closure of the scheme, or a staged closure with or without guarantees.

Cost is a major driver of the employer’s decision to keep or close the scheme, although corporate strategy may play a greater part in the decision process, such as a planned sale of the business. Most companies will now choose to mitigate the potential long term risk and buy out their employees’ pensions if the cost is not prohibitive.

There are a number of employers who have stepped up to the challenge of retaining their pension scheme, have taken steps to review the scheme services, made changes to scheme benefits and have a long term plan for this as if the scheme is an essential component of their business. Employee support can be a major influencing factor, with many employees willing to pay higher contributions to maintain this key benefit.