Introduction
Tony Clare is a pensions partner at Deloitte’s North West office. He has over 22 years’ experience in the sector and is an associate of the Chartered Insurance Institute and a fellow of the Pensions Management Institute. Working across all industries in both the public and private sectors, Tony leads teams advising on transactions and pensions strategy as part of overall reward reviews. He has helped many clients deal with transitions from defined benefits to defined contribution schemes, including leading negotiations with public-sector unions and employees. Tony has also led employee communication programs regarding changes to pension arrangements.
Pensions in the Downturn
With global equity markets having fallen some 30% since January 2008, and with bond markets in turmoil, it comes as no surprise to find that the assets of final salary pension schemes have taken a battering in the current downturn.
Along with the increased deficit, which will consume yet more of their organization’s resources, CFOs are very unhappy about the amount of volatility that is imported into their balance sheets by the current rules for accounting for pension fund liabilities.
Between two and four years ago, a number of finance directors went to their shareholders and convinced them that they had to grasp the nettle on the funding deficit in the final salary scheme. Shareholders agreed to substantial contributions being made over the next year or two so that schemes could be brought back into a fully funded position. If this was achieved, they realized, it would remove a deep source of concern.
However, with the current economic downturn and extreme market volatility, much of this good work has been undone. Matters have been further exacerbated by the impact of increasing longevity.
As people live longer, pension schemes’ liabilities increase with each additional average year of life. As a consequence, companies are discovering that any ground they might have made up in terms of improving their scheme’s funding position has now more than likely evaporated.
One obvious example here that is in the public domain is British Airways. About four years ago the company began a serious effort to overcome the funding deficit in its pension plan. BA paid in around £900 million in additional contributions. However, a snapshot of the fund today shows that its funding deficit is not significantly less than it was before BA threw a great deal of money at the problem.
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