Less gloomy outlook for DB scheme funding: WTW

Just one in six pension schemes report that the Covid crisis has weakened the sponsoring employers ability to standing behind the scheme long term.

This was the result of the latest Willis Towers Watson survey. But while this longer term outlook was more positive, one in three schemes (35 per cent) said the coronavirus pandemic had a more negative short-term impact on the employer covenant. 

Willis Towers Watson head of funding Graham McLean says: ““These numbers are less gloomy than might have been feared, with most schemes believing they have got through the first phase of the pandemic with the employer covenant more or less intact.”

He pointed out that the Pensions Regulator has recently said that fewer employers had deferred deficit contributions in response to severe cash constraints than had been expected.

He adds: “But a meaningful proportion of schemes fear that, although the economic consequences of the coronavirus have not been fatal for their sponsor, they have done lasting damage to its financial health. 

“Schemes whose covenant is looking shakier may re-evaluate their strategies for ensuring that members’ benefits get paid. Some who expected to buy out benefits with an insurer or run the scheme off themselves may explore whether to ‘cash in the covenant’ while they still can and move to a commercial consolidator.”

While 64 per cent of trustees thought they would reach their current long-term objective in no more than nine years, only 28 per cent of corporates thought this likely.

McLean adds: “This disparity should not reflect different views on how funding positions have been affected by market movements: widespread use of tracking tools leaves little room for surprises.  It may instead signal that trustees and corporates will enter the next round of negotiations with starting positions that are further apart than they have been for many years. Creative solutions will have to be explored if they are to find common ground.”

The WTW research also found that 28 per cent of schemes expected deficit contributions to rise following their next funding agreement. Meanwhile, more than half (54 per cent) thought the new approach to regulating funding agreements being prepared by the Pensions Regulator will ultimately cause employers to pay more.

McLean adds: “The Government has never said clearly that it intends the new funding regime to increase cash demands on employers in aggregate. TPR’s indicative blueprint would make many employers pay more if they want to go down the ‘Fast Track’ route. There will, though, be another consultation before details such as maximum recovery plan lengths are firmed up, and the regulator has said this will reflect economic circumstances.”

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