UK - Having piled record amounts into their pension funds to close deficits, many companies are creating devices to minimise the risk of trapped surpluses.
Certain sections of the Pensions Act 2004, The Pensions Regulator’s powers and the Pension Protection Fund’s risk-based levy have all given companies an incentive to improve their scheme funding levels.
However, Lane Clark & Peacock partner Bob Scott said companies were putting in place mechanisms to claw back contributions if they proved unnecessary.
“One organisation has devised an insurance product where you pay the contri-butions to it, the company gets a tax deduction, and it’s recognised as an asset of the pension scheme, but at any time, its value to the trustees is only as much as the deficit in the scheme, so they can never claim it to give them a surplus,” he said.
Royal Mail recently announced it would place £1bn in an escrow account as part of a plan to fund its £6.6bn pension deficit over 17 years.
Watson Wyatt senior consultant Stephen Yeo said he expected more companies to use contingent funding vehicles such as escrow accounts as recovery plans were finalised.
With many schemes closed to new members and some closing to future accrual, many companies are reluctant to pour money into their schemes.
“Whereas in the past if schemes were overfunded, companies could get the money back by taking a contribution holiday or contribution reduction, and use the surplus effectively to provide future service benefits, if there are no future service benefits being offered, then that flexibility is lost,” Scott said.
Partner Insight: Members' evolving needs and expectations are driving changes in scheme administration. As the pensions landscape inevitably continues to change, how will your scheme's approach need to develop to keep pace?
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