Fall in DB scheme funding highlights disconnect between trustees and employer management

11 Aug 2022

According to the latest Pension Protection Fund (PPF) 7800 index, the aggregate surplus of defined benefit (DB) pension schemes in the UK fell for the first time in six months to £254.3bn at the end of July, down from £267.9bn at the end of June.

Commenting on the latest index, Donald Fleming, covenant assessment services partner at RSM UK, said: ‘While uncertainty pervades the global corporate and financial environment, many UK DB pension schemes have seen notable improvements in their funding levels, with some still being in surplus against their PPF liabilities and their ongoing liabilities when calculating technical provisions. The Pensions Regulator (TPR) continues to encourage scheme trustees to plan the journey towards their long-term funding objective and to manage risks through contingency planning. Driven by this, many trustee boards now have a progression to buyout in their sights.’

He added: ‘On the other hand, some employers have begun to express concerns about over-funding their scheme and not being able to recover the excess (known as a trapped surplus). TPR suggests that contingent funding contributions linked to suitable funding and risk triggers should also help to address such concerns. However, this does not address the difference in perspective. If the covenant is viewed by the trustees as relatively strong, it is rational for the employer management to ask why it should now commit to crystalising a major liability in a few years’ time, rather than keeping its options open, when only a limited number of schemes can pay the buyout premium without a large payment from the corporate?

‘This is often the case where the employers are part of large publicly listed corporates where perhaps senior management is overseas or there is little perceived shareholder value in doing so. This difference in perspective means that there is often a real disconnect between trustees and employer management over funding strategies and objectives. There has been a sudden shift in the macro-environment after the COVID-19 pandemic, with employers re-examining the fundamentals of their business models, supply chains and ESG resilience. Perhaps this is the right context for trustees and management to re-examine the fundamentals of their pension scheme and understand these different perspectives.’