Trustees face tough test with pension scheme recovery plans

Pension scheme trustees are on the verge of what may be the most trying period of their career as the first major wave of recovery plans of this recession are due to be submitted to the Pensions Regulator in June and July, says Trustee GAAPS, the trustee search and selection firm.

A recovery plan is the plan agreed between the pension scheme and the sponsoring company to address a shortfall in the funding level of a pension scheme at the time when an actuarial valuation takes place.

Trustees GAAPs claims that with companies announcing weak results for 2008 and the funding deficit of pension schemes leaping 226% to £218.7 billion, negotiations between trustees and sponsoring companies over the terms of recovery plans are likely to be more difficult and complex than ever before.

Figures from the Pensions Regulator show that over 50% of the total number of recovery plans for 2009 will be due in June and July, reflecting the popular year-end for schemes of March and 2 April.

David Johnson, consulting director at Trustee GAAPS, said: “In the past 12 months, pension schemes were asked to be more flexible towards their corporate sponsors by allowing recovery plans to extend over a longer period of time so that contributions could be lowered. But as the sponsoring companies’ profit margins get dangerously thin and the pension schemes’ deficits widen, both are likely to fight their corners much more fiercely.”

“With the long term viability of sponsoring companies becoming less certain, trustees will be prompted to seek a shortening of the period over which the recovery plan stretches or seek more front loading in the schedule of payments into the scheme. This is likely to be met with resistance on the employers’ side.”

Trustee GAAPS says that thorny questions which the pension schemes and the corporate sponsors will need to reach agreement on could include increased longevity of pensioners and the re-valuation of some assets which may have fallen sharply, such as property, pledged to the pension scheme in exchange for a delay in contribution payments.

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Johnson said any factors weakening the employer covenants or the pension scheme’s financial position will add to the tension during the negotiations over the recovery plans. These could include worries over quantitative easing, which by sending bond yields down increases pensions’ deficits and the present value of their liabilities. Furthermore, many pension schemes provide guaranteed increases to pensions in course of payment  (e.g. 3%), which would result in significant increases in the present value of †benefits paid if deflation came into play, while deflation would also squeeze profit margins of the corporate sponsor.

“This time around discussions promise to be more fraught than ever so trustees will need to move with tact and exercise their best negotiation skills. Trustees will need to seek the right trade off between getting as much funding for the scheme as possible and ensuring that funding of the scheme does not jeopardise the long term future of the sponsoring company,” said Johnson.