More than 500 companies are expected to delay tackling pension deficits in the wake of the Covid crisis.
New analysis by consultants Lane Clark & Peacock (LCP) says the total payments now being deferred is expected to be around half a billion pounds.
It has been reported that a number of high profile employers, such as Arcadia and Debenhams, have sought to delay making deficit repaid contributions. But this analysis — the result of a survey of more than 100 industry experts and data from 200 schemes — suggests many more firms will be adopting a similar strategy.
The survey suggests around 10 per cent of sponsoring employers are likely to delay making contributions by at least 3 months.
As at March 31 2019, the Pension Protection Fund indicated that there were 5,436 defined benefit pension schemes in operation in the private sector, suggesting that more than 500 could see contributions put back.
Data prepared by the Office for National Statistics shows that, in a typical quarter, employers pay around £5.5 billion into DB schemes, with the large majority of this being to clear deficits. If 10 per cent of schemes see a delay, this would suggest around half a billion pounds will be held back.
Firms are able to delay these payments, thanks to new flexibilities set out by the Pensions Regulator. These allow companies to delay making contributions if they are in financial difficulties, as a result of the coronavirus pandemic, and subsequent economic lockdown.
However payment delays must be agreed with trustees and the regulator has put certain safeguards in place, for example, requiring firms to also cut back on dividend payments and bonuses. They must also explored other methods of easing their short-term cash-flow problems.
LCP says there are a number of reasons why some employers may not seek to take advantage of these new easements include:
- A substantial minority of schemes are in surplus and have no deficit recovery payments;
- Some employers are in sectors which have not been as adversely affected by the current crisis;
- Some deficit contributions are only due irregularly (eg annually or twice yearly) and the next contribution for a given scheme may not be due for some months;
- Some employers may judge that maintaining their contributions now will help support long-term plans for tackling the deficit;
LCP partner, Jill Ampleford, partner says: “Some firms that are fundamentally sound are nonetheless facing huge short-term cashflow pressures during the present crisis.
“The ability to agree with trustees a delay in making pension contributions will help them to weather the present storm and continue their support to the scheme in the long-term.
“But it will be vital to get things back on track once the crisis is over so that a realistic plan is put in place to deal with the shortfall in the pension scheme, particularly as this could have materially increased due to changes in financial markets”.
LCP partner Steven Taylor adds: “Generally, the best way to ensure that member pensions are paid is to ensure that the sponsoring employer stays in business.
“In the short-term, this may mean easing cashflow pressures, including agreeing a package of measures with creditors that includes holding back on agreed pension contributions for a short period of time. Most employers will not take this step lightly and will do so only when other avenues have been exhausted”.
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