UK Employers Seek to Reduce Pension Scheme Contributions Following Windfall from Interest Rates

Employers in the UK are pushing to suspend pension contributions that amount to tens and tens millions of pounds, after retirement schemes have experienced unexpected surpluses.

Investment advisers for FTSE listed companies that offer “defined benefit” pensions, which pay a guaranteed amount based on the employee’s wage and length of employment, say employers are looking more to come to agreements with trustees about ending payments.

Employers and trustees usually agree on a pension funding plan every three years. In the last 15 years, the majority of UK’s 5,200 DB pension schemes have reported funding deficits and deficits because interest rates were low. The sharp increase in interest rates over the last year has resulted in a surplus for most schemes.

Edd Collins is a senior director at WTW. He said that he has clients who have reached agreements to stop contributing.

He said: “Employers – some of the largest FTSE listed companies – are reaching out to trustees to say that they want to stop paying deficit contributions and negotiate. “They say: ‘We do not think we need them any more.'”

Actuaries consider long-term rates of interest when calculating the costs of pension promises that can extend decades into the future. As interest rates increase, liabilities of the scheme tend to decrease and vice versa.

According to the Pension Protection Fund’s lifeboat scheme, there were 4459 schemes in February of this year that were in surplus. Two years earlier, 2,479 schemes were in surplus while 2,839 were in deficit.

John Dunn, PwC UK’s head of pensions and transformation, said that if a pension scheme was very well-funded, it would be under pressure to stop contributions. This is part of the valuation exercise which is currently taking place or is about to begin.

He added, “We see this all over the market.”

Collins stated that employers will use the cash released from DB plans to invest in business or fund contributions to other pension schemes where employees do not receive a guaranteed retirement income.

The trustees said that employers now want to move the next three-yearly check forward.

“We can see that some valuations are being done to allow a more in-depth look at new cash flows,” Chris Roberts said, professional trustee and managing Director at Dalriada Trustees.

Stephen Purves said that ceasing to make contributions is a “much commoner” request, and a “reasonable” thing to do to avoid the scheme being overfunded.

The Pensions Regulator estimated last week that a quarter or 1,000 DB plans were well-funded enough to pay an insurance company to assume the liabilities of the scheme, or to do a deal called a “buyout”, removing the scheme completely from the employer’s control.

Purves said that most funding agreements are terminated once certain thresholds are reached. Being fully funded for a buyout is one of them.

In some cases, trustees might be willing to accept a mechanism that allows contributions to restart in the event those gains reverse.

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