UK – A FTSE 350 company’s ability to support its pension fund has yet to return to pre-recession levels, PwC has warned.

Due to the persistence of low interest rates, lower investment returns and high inflation, deficits are “unlikely” to improve without sponsors and trustees intervening, the consultancy said.

Jonathon Land of PwC noted that trustees were faced with an environment that was no longer a “standard economic cycle”.

“If investment returns remain low, and company earnings do not rise in line with inflation, companies will find they are paying a greater share of those profits towards covering their pension deficit,” he said. “This will only add further pressure on those companies that are already weak.”

According to the consultancy’s Pensions Support Index, the overall level of support afforded to defined benefit schemes was currently at 74 out of a possible 100 – an improvement over 64 in March 2009 but below the 88 score awarded at the beginning of 2007.

PwC pensions partner Jeremy May said sponsors needed to work with trustees to consider the amount of risk when planning recovery plans, underlying funding assumptions and the scheme’s investment strategy.

May also urged funds to re-examine their “traditional thinking” when it came to investment strategy, given the current low sovereign bond yields.

“This could include reducing government bond holdings and increasing their exposure to well-diversified businesses that could provide a better risk/return balance, or seeking insurance-based transactions that potentially lock in enhanced returns,” he said.

In other news, gender-neutral pricing on insurance premiums will lead to mismatches between pension fund liabilities and the assets required for buyouts, Pitmans Trustees has warned.

Noting that both policies used by pension funds and the actuarial calculations used by schemes were exempt from the change – effective from 21 December – Richard Butcher, managing director at Pitmans, noted that this would be at odds with the unisex rate employed by insurers, as it would be impractical to offer different rates for different customers based around individual exemptions.

He added that funds would nonetheless have to use gender-specific actuarial calculations, or risk less realistic actuarial valuations.

“And herein lies the problem,” he said. “The statutory ‘exit route’ for any employer with a DB scheme is to provide funding sufficient to allow all benefits to be bought out with an insurer – and this will be on a unisex basis.

“Funding, however, will have been based on gender-specific rates. There is a mismatch. Either too much money will have been set aside or too little, neither of which is attractive from the employer’s perspective.”

He said that while the problems posed by unisex versus gender-specific valuations was not insurmountable, the question of when, if at all, a fund were to switch to gender-neutral valuations prior to a buyout was an additional factor now in need of consideration.

Meanwhile, the National Association of Pension Funds (NAPF) has partnered with a US law firm to launch a guide on class-action lawsuits.

Noting the importance of class-actions suits, chief executive Joanne Segars said they would offer funds the opportunities to redress financial losses “worth billions of pounds every year”.

“It is vital that trustees and managers understand how they work,” she added.

Mark Solomon, partner at Robbins Geller Rudman & Dowd, added that securities lawsuits were a “powerful tool” available to investors, both to claim losses and achieve reforms to a company’s governance structure.

“Fraud monitoring services enable investors to know of losses in their portfolios caused by fraud or other corporate misconduct,” he said.

“By engaging such services, institutional investors are increasingly able to make informed strategic decisions and thereby maximise their investment returns by the prudent exercise of their legal rights.”

Lastly, Mercer and Aon Hewitt have welcomed the government’s ‘Reinvigorating Workplace Pensions’ proposal outlined by the Department for Work & Pensions (DWP).

The measures aim to rebuild confidence in workplace pensions and bridge the divide between defined benefit (DB) and defined contribution (DC) pension schemes by introducing ‘defined ambition’ plans.

According to Mercer, risk-sharing between employers and employees, and pushing for higher savings, were “admirable” goals.

But it said their success would depend on ensuring that people saving for retirement understood the way risk and cost was balanced between them, their employer and the government, and making sure future governments refrained from moving the goalposts. 

Aon Hewitt called on the government to move swiftly for reforms to be effective.

For James Patten, benefit design specialist at the consultancy, the idea raised in the DWP paper to “unshackle” DB pension provision from expensive legislative constraints, such as compulsory pension increases, will give employers more options to retain some form of DB provision rather than automatically closing to accrual when faced with untenable costs.

“However,” he added, “if the reforms are to be effective in the private sector, the government will need to fast-track these particular elements to the proposals to avoid closing the stable door after the horse has bolted.”

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