A Kevlar thread running through many of the current funding themes is the expectation of fairness between stakeholders and providing suitable mitigation where needed. As a result, the chosen approach to deficit management may in some cases have fundamental consequences for dividend policy and may require increased use of legally enforceable contingency arrangements. For example, in the British Airways case, it’s reported that the agreement with the Trustee to defer contributions covers security granted to the pension scheme and limitations on dividends and other payments out of the company. A carefully considered approach to stitching together a deal that works for everyone is a must.
Key areas of current focus for a functional funding strategy include:
- Some employers are looking to defer deficit contributions in light of current finances. The reasons vary by business but are likely to be driven by the pandemic, Brexit, industry change and/or Net Zero. As mentioned above, a recent high profile example has been British Airways, which agreed to defer £450m of pension contributions given the huge impact of COVID-19.
- The increase in corporation tax for larger companies to 25% from 2023, as recently announced in the 2021 Budget, means there is a potential incentive to defer pension contributions until the higher relief can be obtained, but from that date may make them more palatable because of the extra relief. Tax advice may be helpful in this area.
- The challenge of fashioning a workable solution to cross-industry scheme deficits. USS is in the news once again, with the employers’ group, UUK, strongly resisting the valuation assumptions resulting in a deficit of over £14bn and consulting employers on alternative proposals for a sustainable scheme.
- The impact of the announced changes to RPI from 2030 on liabilities and on investment strategy. There remains a loose thread of uncertainty as the BT, Ford and M&S schemes are currently seeking judicial review of the decision to reform.
- The impact of the Pension Schemes Act 2021 clothes the whole debate in another layer or two of considerations. To reflect enhanced Regulatory powers expected to come into force from 1 October, there will be a greater onus on employers and others to consider and justify funding agreements and any material changes to them. Further down the line, employers will need to agree a long-term funding and investment strategy for each scheme, and take it into account in constructing 3-yearly funding deals. Alongside this, the new DB funding Code of Practice will bring in important considerations about whether to follow the template “fast track” or follow a “bespoke” approach to valuations from 2022.
As ever, there are many constituent parts to redesigning and tailoring an existing funding strategy that balances the interests of all stakeholders.
Please contact us to discuss any of these matters or request essential training on the Pension Schemes Act 2021 for key stakeholders.