UK Firms Could Face Intensified Pressure to Plug Pension Deficits

(April 13, 2011) — UK companies could be forced to pay off pension deficits more quickly if new proposals are passed, consultancy Towers Watson has asserted.

The European Insurance and Occupational Pensions Authority has been requested to ensure that recovery periods are harmonised for all member states. As a result, the Authority has threatened to slash permitted UK recovery plan lengths. “The commission thinks national differences are depriving employers of the right to operate pension schemes that cross borders…However, most employers will be more concerned about how harmonized rules might affect their responsibilities in respect of pensions they have already promised to employees in a particular country,” John Ball, head of UK Pensions at Towers Watson, said in a statement.

According to Towers Watson, the European Commission’s aim for a revised Pension Directive, which calls for “consistent” recovery periods for all member states, would decrease the length of permissible recovery plans in the UK, bringing them up to speed with the rest of Europe. The goal of the Commission: to achieve a level of “harmonization.”

Towers Watson believes that the Commission should be aware that diverting an increasing amount of cash into some UK company pension funds would threaten funding levels. According to Ball, 61% of the defined benefit (DB) pension liabilities covered by the directive were in the UK and 24% in the Netherlands, “so a common set of rules will primarily affect employers with DB liabilities in these two countries”.

The rising pressure facing UK schemes to plug deficits quickly has been regarded as a hindrance by groups such as Hymans Robertson. A report issued earlier this month by the consultant firm revealed that the regulatory focus on plugging scheme deficits quickly is actually a hindrance.

“In our view, most schemes, and scheme sponsors, would benefit from a slower, more stable, approach to funding,” Clive Fortes, Head of Corporate Consulting at Hymans Robertson, stated in a release. “In this regard, the regulatory focus on speed of recovery is unhelpful and potentially damaging to businesses and to their pension schemes.”

According to Hymans Robertson, this anticipated upswing in de-risking activity by schemes this year is likely to focus on 1) investment strategy, 2) risk transfer, with an expected spike in the growth of risk transfer and buyout deals, and 3) liability management.