UK - ABN AMRO has warned the new UK pension funding rules will force employers and trustees to consider using contingent funding structures to solve funding issues and clear pension deficits.
The rules replacing the Minimum Funding Requirement apply to actuarial valuations of defined benefit (DB) schemes from 23 September, when the EU Pensions Directive comes into force.
Speaking at the Association of Corporate Treasurers' annual pensions conference held at ABN AMRO’s London office, the bank’s head of actuarial, Francis Fernandes (pictured), warned: “The new UK Pensions Act will give greater powers to pension trustees to accelerate funding into company DB schemes.
“The new Pensions Regulator is also likely to demand higher contributions in the short term where schemes are underfunded against the Pension Protection Fund (PPF) target, as they pose a greater threat to the stability of the new safety net.
Fernandes argued many employers were only just waking up to the sharp hike in contribution demands they could face under the new rules. “Many trustees will need to adopt tougher targets focused on the security of members' pension benefits in the event of employer insolvency.
“I can see more employers unable to find the cash and looking to provide the security trustees are demanding through contingent funding structures,” he said.
Fernandes cited an example of letters of credit, where an employer arranges for one or more banks to provide a payment equal to part or all of the likely pension deficit in the event of insolvency.
This arrangement may have some further benefits for the employer, like lower risk-based PPF levies.
Such contingent structures will allow employers to enter into a more realistic discussion with trustees about funding deficits, because the trustees can draw comfort that strongly capitalised banks will pay up in the event of employer insolvency,” he continued.
Keith Jecks, global head of pensions advisory at ABN AMRO, commented: Contingent funding structures are not solutions in themselves. Pension deficits will still need clearing, but these types of structures enable employers to remove them in a more affordable way.
“They can also give continued scope for controlled investment risk-taking, where pension trustees might otherwise be forced into closing out investment risk by switching into bonds.”
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