Credit crunch could cause contribution demand rises - EXCLUSIVE

The consultant said a widening of double-A corporate bond yields had made trustees nervous that funding on this basis was too weak and noted many had become concerned that corporate financial strength had deteriorated.

PwC partner Raj Mody warned these influences tended to result in trustees pushing for greater prudency in their calculation of technical provisions, resulting in higher contribution demands.

He said there was a risk these higher contribution demands could be inappropriate for the scheme and urged employers to beware of "prudence creep" by trustees when setting cash funding assumptions.

Mody explained: "The whole machine of a pension scheme’s operation needs a long careful look, and arguably funding needs recalibration to allow for the different market conditions we now see ourselves in as a result of the credit crunch."

PwC also said employers should take control of managing the trustees’ perception of the employer’s covenant to the scheme – helping trustees to understand the appropriate degree of prudence to build into funding objectives – and consider use of contingent assets to cut cash funding commitments.

The firm said the credit crunch would also have implications for scheme investment strategy along with buyout and risk-transfer pricing.

Mody said corporates should work with the trustees to review scheme assets to identify opportunities presented by current market conditions and, if they were planning to buyout the scheme, encourage them to move to investments providing better protection against the buyout price.

He said: "Employers need to assess the materiality of each issue and take the appropriate actions to manage the financial impact."