This is a clear sign that the risks of defined benefit pension schemes need to be managed to limit the impact on the business.
Large demands
Pension deficits increased over the last two years despite significant contributions by companies. This has combined with significant constraints on business' discretionary cash flow. As a result, based on KPMG's study, just under a quarter of the FTSE 100 are now not able to clear their pension deficits over any reasonable timeframe from discretionary cash flow. At the same time many trustees, encouraged by the Pension Regulator, are taking a more cautious view of future returns and companies have come under increasing pressure from pension trustees to repair deficits more quickly.
Tough choices
Businesses are now questioning the sustainability of defined benefit pensions. In the current economic climate companies need to maintain financial flexibility. Increasing demands for funding from pension schemes are is potentially limiting this flexibility. Companies are having to make tough choices around employment levels, capital investment, debt financing and balance sheet repair
Alternatives to cash
Businesses are also seeking alternatives to paying cash into the pension scheme. Not only does this help maintain flexibility in the business but it can also provide leverage in future funding discussions.
KPMG has significant experience in helping companies to:
- set appropriate levels of pension cash funding;
- design and implement alternate arrangements that allow reduced cash funding;
- review the appropriate level of pension benefits to provide employees; and
- negotiate with trustees, unions and the Pensions Regulator.
