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DB schemes appeal for contribution breaks as Corona crisis escalates

19 Mar 2020

As households and small businesses are appealing to banks for a mortgage holiday, defined benefit schemes have approached the regulator to request a break for their pension contributions payments.

As global stock markets have turned sour and gilt yields have fallen, defined benefit pension schemes across the country are facing a double whammy of falling asset values and rising liabilities.

Trustees are receiving requests from pension schemes to temporarily halt pension contributions to alleviate short-term cash constraints, the Financial Times reported.

The move could free up cash for employers in a challenging market environment, but risks widening the pension deficit.

Schemes with high deficits or those exceeding the market capitalisation of the sponsoring employer face the biggest challenges. Examples include retirement schemes sponsored by BT, Centrica and British Airways.

Another scheme in the eye of the storm is the University Supperannuation Scheme (USS), which has recently launched its valuation. In line with FRS102 reporting standards, the scheme’s asset values will be calculated based on a snapshot of asset prices on 31 March 2020. Given the current performance of stock markets, the results are unlikely to be flattering.

In i’s most recent valuation update, USS, which last year had £69.4bn of assets under management, acknowledged that it had breached its internal self-sufficiency measure on five consecutive days this month and has subsequently reported itself to the regulator.

USS uses the self-sufficiency measure to estimate the level of low risk “self-sufficiency” deficit at the current levels of 10% employer contributions annually over the next 30 years. With the referral to the regulator, USS’ board is likely to make the case for an increase in deficit contributions.

FTSE100 defined benefit schemes have stepped up their efforts to cover funding shortfalls with sponsors paying almost £8bn in contributions over the past year, according to JLT Employee Benefits.

Nevertheless, pensions contributions are still dwarfed by dividend payments. More than a third if all FTSE100 firms could have settled their pension deficit with one year’s worth of dividend payments, research by JLT Employee Benefits shows.

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