Typical Scheme Example (as at November 2006)
Take a typical mid-market pension scheme with assets of £100m equalling liabilities at their last funding based valuation around three years ago. This would have been based on equity discount rates and mortality tables prevailing at that time. Individual scheme membership patterns and benefit structure make for considerable variation in relationships but typically different values now placed on the past liabilities will be approximately:
| Typical pre Pensions Act 2004 valuation basis (equity based discount rates, prevailing mortality) | £100m |
|---|---|
| Typical IAS19 liability (corporate bonds updated mortality) | £170m |
| Pension Protection Fund (PPF) liability | £170m |
| Deferred Annuity, buy out cost | £250m |
Asset growth of say £20m to a current value of £120m will have served to mitigate, but our typical company might now be faced with: -
- A disclosed deficit on the balance sheet of c £50m.
- A demand, as a minimum for a company with a strong covenant, for annual cash contributions say £5-10m in addition to the cost of accruing benefits.
- An effective requirement to seek clearance from tPR for any corporate actions such as raising secured debt, business transactions or dividend payments (Type A events) that could weaken the pension creditor. In this instance tPR is likely to require a short term plan to fill the deficit on the PPF basis.
The position is often particularly difficult in the traditional industries where DB pensions have been the norm and employee numbers may have fallen leaving a pension scheme disproportionate to the size of today’s business. It is essential then to take advice and practical implementation of any strategies that deal with the obligations in the context of the company’s financial and strategic plans as a whole.
