The pension surpluses of 2007 may have been wiped out by recent market turmoil, but pension schemes should be able to continue paying their accrued benefits, according to Mercer’s U.K. office. However, this is dependent on the sponsoring employer remaining solvent.
While the deficits incurred by the current economic environment will damage companies’ balance sheet positions, the British government’s bailout of the banking industry will increase the supply of gilts (government bonds), which should result in higher yields, says Mercer.
“Corporate bond yields are also higher than they have been for a number of years, even after allowing for increased insolvency risk,” says Deborah Cooper, a principal with Mercer’s retirement resource group in London. “As a result, balance sheet liabilities have not fallen as steeply as markets suggest.”
Cooper explains that the most common action taken by employers to reduce pension scheme risk has been to put large contributions into the scheme, but if the trustees choose to invest these in equities, it may not be an effective risk management strategy, as recent events have shown.
Instead, trustees should be prepared to consider strategies that might protect the company from future deficits, says Mercer. For example, payment of large deficit contributions could be made dependent on trustees taking specific investment choices, or companies could suggest paying deficit contributions to the scheme over a longer period, in return for contingent security outside the scheme, where the employer can retain some control of the asset.