UK - Credit rating downgrades over scheme liabilities are putting firms under increasing pressure to close final salary plans, industry experts warn.
And they believe directors will walk away from their pensions promise rather than jeopardise their firm’s reputation in the eyes of investors.
Both Moody’s and Standard & Poor’s have downgraded companies because of scheme deficits.
BAe Systems was downgraded by Moody’s from A2 to just three places above “junk” status while S&P completely relegated German steel giant ThyssenKrupp’s to high yield.
PricewaterhouseCoopers said that with the current pitfalls in the MFR regime, it was possible that firms could legitimately cut their schemes at a severely underfunded level.
This action would mirror shipping giant Maersk, which provoked a storm of controversy last year when it wound up the £6.4m Sea-Land Service Pension Plan because it was not prepared to continue funding the scheme.
Some 200 scheme members were left with 60% cuts in their pensions entitlement.
PwC partner John Shuttleworth said it was inevitable that companies would try to slash their liabilities by emulating Maersk in the light of credit downgrades.
“Without a doubt this will happen, it is just a matter of time before a company walks away from their scheme in order to save their credit rating. The surprising thing is that this hasn’t happened already.”
Isis Asset Management head of bonds and treasury, Andrew Tunks, said that while agencies were entitled to look at pensions, they were wrong to view them as liabilities and to downgrade firms because of them.
He said that while firms were required to make good on their other debts, they only have a moral – not legal – obligation to pay pensions.
“Maersk proved that pension schemes are not a liability, because companies can walk away from them.
“Firms are not required to make good on these deficits on a daily basis.”
OPAS chief executive Malcolm McLean urged the government to tighten the MFR regime to ensure that companies that do decide to axe their schemes will have to meet the full buyout costs.
The Pensions Regulator (TPR) has granted 11 master trusts extensions to apply for authorisation, as it confirms it has received 22 applications ahead of the 31 March deadline.
Aegon Master Trust, Fidelity Master Trust and Ensign have sent off their authorisation applications to The Pensions Regulator (TPR).
Self-administered pension funds spent £15bn on payments to pensioners in Q4 2018, but received just £12bn in contributions (net of refunds), Office for National Statistics (ONS) data reveals.
Aberdeen Standard Investments (ASI) and Gresham House are to team up to form a joint venture.