Three-quarters of companies 'will need longer to pay off pension deficits'

Three-quarters of UK companies with pension deficits say they will take longer to pay them off than they were planning, thanks to the economic downturn and the Bank of England's policy of quantitative easing, according to analysis by the government's Pensions Regulator.

 

The regulator said earlier this year that it would treat companies with more flexibility over their pensions bills, given the prevailing economic environment. Chief executive Bill Galvin said in April that it was "prepared to tolerate longer recovery plans".

While the authority is at frequent pains to point out it has never insisted companies pay off their deficits in any particular period, for many years it treated a recovery period longer than 10 years as a "trigger" to take a closer look at a firm.

But last week, Galvin said at an industry show: "I would like to make it clear that our approach to reviewing recovery plans does not hinge on a 10-year trigger. There is no upper limit to recovery plan lengths and what is appropriate will depend upon the individual circumstances of the scheme."

Yesterday, it said it was "publishing evidence of how some of the flexibilities in the funding regime" have been used by UK firms.

Stephen Sopher, the regulator’s executive director of regulation for defined-benefit, or final-salary pension plans, said the authority expects the average length of companies' deficit recovery plans to increase by three years on average, during the next round of pension-fund valuations.

The regulator said that according to its analysis, 25% of pension plans would be able to continue with their current recovery plans with no changes. But the remainder would need extra flexibilities, such as a three-year extension to their recovery plans or a 10% increase in payments.

Industry commentators said the figures showed the funding pressures schemes are under thanks to low bond yields, which are used in their liability calculations. Low yields make estimates of liabilities appear larger.

Mel Duffield, head of research at the National Association of Pension Funds, said: “This clearly shows the intense pressure that pension funds are under at the moment ... that so many schemes are having to explore the [Regulator's] flexibilities shows that these are exceptional times.

"The flexibility of the system is greatly valued by pension funds, but we do not think it is enough. There needs to be a wider rethink about how deficits are valued in relation to gilts.”

Jane Curtis, from the Institute and Faculty of Actuaries, a trade body, said: "It is helpful that the regulator has conducted this analysis which highlights how the funding position of schemes is impacted by the current economic environment."