Scheme Funding Deficits Could Hit £295bn
If all the benefit schemes in UK had to have a mark-to-market funding valuation at 30 September, the aggregate deficit could be as much as £295 billion, according to global accounting and business consulting firm KPMG.
Historic data from the pensions regulator shows that the scheme funding liabilities have on average been about 105 percent of Pension Protection Fund (PPF) liabilities, or 5 percent higher, adding £50 billion to the recent data for September published by the PPF.
The figure assumes that trustee funding measures continue to be a little more prudent than the PPF level of liabilities on average. At the same time the impact of the latest round of quantitative easing could depress long-dated gilt yields, leading to a further £45 billion rise in deficits.
“In the normal course of events, a spike is not important as pension deficit values move all the time and a company’s next valuation date may be some distance in the future but it will be a concern for companies who face either a valuation date shortly or those involved in transactions or restructuring,” said David Costley-Wood, restructuring partner at KPMG.
According to Costley-Wood, any refinancing or disposals are complicated by the increased creditor claim the scheme holds.
At the same time, pension trustees will be minded to ask for increased cash contributions, which may be in scarce supply for many companies.
“The other growing trend we are seeing is the emergence of pensions ‘zombies’ – companies with marginal growth or loss – which may well be pushed into insolvency if their pension deficit turns into a ‘black hole’,” Costley-Wood added.
“Pension funds have already taken a battering over the past few months from both tumbling equity markets and falling gilt yields, but this is set to be compounded by the second round of quantitative easing, which will see gilt yields fall even further; piling on the pressure in the boardroom,” Paul Cuff, pensions M&A partner at KPMG, said.
“Ultimately if quantitative easing has the desired effect of economic stability and growth it will be positive for pension schemes and will improve their long-term health,” Cuff added.
But Cuff went on to say that in the short-term it creates significant pension deficits because gilt yields underlie many pension scheme valuation models.
Last month, there has been a recovery in equity markets which will reduce deficits, but the environment remains uncertain and the full impact of quantitative easing has not yet been felt, according to KPMG.
“However, we are seeing companies trying to find ways to grapple with the leviathan. Recent examples include companies offering pensioners increased upfront pensions in exchange for future increases,” Cuff said.
“The board have to hope that the trustee and regulator will be sympathetic to the artificially exacerbated situation caused by quantitative easing,” Costley-Wood said.
“Moreover, they will also have to hope for the understanding of wider stakeholders such as their lenders and credit insurers. Trustees are also in a difficult situation, under pressure from the regulator to extract more cash and from companies to explain why the benefit of the cash previously put in has been lost through asset or liability movements outside their control.
Costley-Wood noted that the size of the deficit is less important for companies which do not have a valuation for some time but those with valuations due at the end of the next quarter – particularly those in distress – will be the most worried.