By Carolyn Cohn and Simon Jessop
An increasing number of British companies, trying to conserve cash through the coronavirus crisis, are seeking more time to plug pension scheme deficits, forcing pension trustees to make some tough choices, industry sources say.
Many of these "defined benefit" pension schemes are closed to new members, but more than 7 million people are still paying into them, including thousands of workers from the country's biggest companies.
The pension deficit issue also has an impact on investors, as the country's pension watchdog has said companies should resume payments into pensions schemes ahead of dividends to shareholders. And big pension scheme deficits can also become major hurdles to M&A activity.
Pension deficits have ballooned during the pandemic because of its impact on stock markets and bond yields. The country's 5,000-plus defined benefit, or "final salary" schemes, had a collective funding gap of 176 billion pounds at end-May, its widest since August 2017 and compared with only 11 billion pounds at end-2019.
Two-thirds of the 5,422 defined benefit pension schemes in the PPF 7800 index are in deficit. The index represents pension schemes outside the public sector.
Mindful of the pressures facing company boards, with whole swathes of the economy out of action, the pensions regulator in March said pension fund trustees should be open to deferrals of top-up payments by companies to fix deficits, usually for three months. The regulator said it would review this guidance by end-June. https://www.thepensionsregulator.gov.uk/en/covid-19-coronavirus-what-you-need-to-consider/db-scheme-funding-and-investment-covid-19-guidance-for-trustees
Industry sources told Reuters they expect the watchdog to support further payment holiday requests, in line with government extensions to furlough schemes for companies under pressure from the months-long quarantine.
A spokesman for the Pensions Regulator said the watchdog might issue more guidance before the end of June, but did not give more detail.
As many as 15% of companies have sought a deferral already, according to the regulator.
Mike Smedley, partner at consultants Isio, said this is likely to represent a record drop in pension fund contributions.
The companies include threadmaker Coats Group and media companies Reach and ITV, with more expected to follow when they publish their next set of earnings.
Bina Mistry, senior director at consultants Willis Towers Watson, said given loss of earnings due to the economic crisis, the number was likely to grow: "The longer this goes on, the harder it becomes."
Industries from travel to hospitality and retail have asked for and received a three-month deferral to buy time to assess the economic damage to their businesses. But the real dilemma for pension fund trustees will be if they come back to ask for a potentially much longer break.
Pension fund trustees' primary focus is on securing pension payouts over decades so they do not want companies to go bust, which would mean reduced payouts for members from industry lifeboat the Pension Protection Fund.
At the same time, though, they do not want the funding gap to grow so big that companies struggle to fill it.
"The initial (deferral) requests (were) very much about helping the company not to run out of cash," said Huw Evans, director at independent trustee group BESTrustees. He also said that longer deferrals would "involve trustees doing far more due diligence as to what they think the future prospects of the company are."
An important part of that process will involve checking that companies do not let go of their pensions obligations too lightly, and that they are also making other cuts, such as to dividends and management pay.
Some companies may offer security to the pension in case payments never resume. Martin Hunter, a partner at XPS Pensions Group, said such security had to be something which gained in value over time, usually in the form of property.
(Editing by Jane Merriman)