Opinion: Cash conservation for sponsors

15 Jun 2020
Two men in business meeting with paper and pens

Many companies will need to preserve cash and rebuild over an extended period. Pension cost savings can be very significant if you look hard enough – while still protecting the scheme.

 

Up to now the simple answer for struggling sponsors has been to get breathing space by temporarily suspending deficit contributions. Pension scheme trustees and the Pensions Regulator have been flexible and supportive. A recent survey of Isio clients showed that 12% of sponsors had asked trustees to suspend deficit contributions by April 2020.

The growing consensus is that recovery is going to be long and difficult. There will be pressure points when government and lender support comes to an end. The situation is exacerbated by the upward pressure on pension costs due to market conditions since the outbreak and tightening pension funding rules.

The need to preserve cash has to be balanced with the continuing need to support DB pension schemes. One of the themes of the Pensions Regulator’s recent Annual Funding Statement is the fair treatment of the pension scheme with other stakeholders.

Where can costs be reduced?

Further reductions in deficit funding is going to be the first port of call – either extending suspension periods or a lower level of contributions. While trustees may be sympathetic, they are likely to impose strict conditions on sponsors and look closely at the position of other creditors and shareholders. The Pensions Regulator encourages trustees to seek downside protection and everyone will be looking harder at what forms of security can be provided to the scheme.

To support a longer reduction in deficit contributions, our experience is that almost all sponsors can find something to offer by way of contingent assets or asset-backed security. In the current environment trustees may see any security as an improvement, even it’s less robust than they would like.

Benefit change is another area to consider. A surprisingly high number of DB schemes remain open to future accrual where costs are likely to be significant. Options are not confined to DB plans, changing contributions for those in defined contribution plans is another possibility.

There are a number of second order costs that can also mount up and have potential for savings, including running expenses and PPF levies.

What should sponsors do?

Companies are leaving no stone unturned on cash management and pensions is no different. Achieving the best outcome means considering the full range of options.

A systematic process can deliver an improved pensions outcome. Starting with understanding the choices and specific constraints for each business, the needs of the scheme and financial analysis of the viable alternatives. All leading to an executable cash conservation plan.

 

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What about the Trustees?

Trustees need to be persuaded and ultimately supportive of the company’s actions. The key issue is treating the scheme fairly vis-à-vis other stakeholders. This means ensuring that lenders are treated consistently, that shareholders play second fiddle and there’s a long-term plan to support the scheme. It’s critical that sponsors can demonstrate a credible business case.

What can be achieved?

In our experience this bottom up approach to reviewing pension costs alongside creative use of security can deliver significant cash savings. In some circumstances we have seen short-term cash costs reduced to zero apart from ongoing DC contributions.

Each sponsor will need a different approach that works for them. If you would like to discuss how to get the best outcomes for you and your scheme, please contact us