UK - Turmoil in the financial markets has made the outcome of pension funding negotiations between employers and trustees much less certain, Towers Watson has said. 

Depending on how trustees and employers react, this could lead to significantly higher contributions from companies or to longer than anticipated deficit repayment periods, according to the consultancy.

Towers Watson estimated that, for a scheme whose assets were 90% of its liabilities on 31 March, the funding level determined on the same assumptions would be 80% today if two-thirds of its assets were in equities.

If changes to equity prices and gilt yields since March are taken into account, this could double the contributions required to pay off the deficit within any particular time frame, the firm said.

John Ball, head of UK pensions, said: “To repair a bigger deficit, trustees need increased contributions from the employer or higher investment returns from their assets. 

“If they can’t expect either of those things, the deficit must be paid off over a longer period, with members’ benefits less secure in the meantime.”

The precise impact of recent market movements will vary considerably with the circumstances of each individual scheme, Towers Watson said.

For example, while a scheme with two-thirds of its assets in equities and one-third in index-linked gilts might have seen funding levels fall from 90% to 80%, a scheme with two-thirds of its assets in index-linked gilts and one-third in equities would have seen a 90% funding level fall to 85%.

Ball added: “Most schemes are relying on higher investment returns from equities to do some of the heavy lifting when it comes to getting back in the black, and have significant exposure to market volatility as a result.

“An important question for trustees and companies is: do they view recent events just as an example of that volatility? Or do they believe something fundamental has changed, which means they must anticipate lower investment returns between the valuation date and the time when benefits are paid out?

“If the former, they need to hang on for the ride, which is likely to continue to be bumpy. If the latter, they need to consider what action they should be taking.”

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