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* Final salary schemes have a 176 bln stg deficit
* Regulator expected to extend deferral flexibility
* More companies set to ask trustees as economic pain hits
By Carolyn Cohn and Simon Jessop
LONDON, June 10 (Reuters) - An increasing number of British
companies, trying to conserve cash through the coronavirus
crisis, are seeking more time to plug pension scheme deficits,
forcing pension trustees to make some tough choices, industry
sources say.
Many of these "defined benefit" pension schemes are closed
to new members, but more than 7 million people are still paying
into them, including thousands of workers from the country's
biggest companies.
The pension deficit issue also has an impact on investors,
as the country's pension watchdog has said companies should
resume payments into pensions schemes ahead of dividends to
shareholders. And big pension scheme deficits can also become
major hurdles to M&A activity.
Pension deficits have ballooned during the pandemic because
of its impact on stock markets and bond yields. The country's
5,000-plus defined benefit, or "final salary" schemes, had a
collective funding gap of 176 billion pounds ($222.66 billion)
at end-May, its widest since August 2017 and compared with only
11 billion pounds at end-2019.
Two-thirds of the 5,422 defined benefit pension schemes in
the PPF 7800 index are in deficit. The index represents pension
schemes outside the public sector.
Mindful of the pressures facing company boards, with whole
swathes of the economy out of action, the pensions regulator in
March said pension fund trustees should be open to deferrals of
top-up payments by companies to fix deficits, usually for three
months. The regulator said it would review this guidance by
end-June. https://www.thepensionsregulator.gov.uk/en/covid-19-coronavirus-what-you-need-to-consider/db-scheme-funding-and-investment-covid-19-guidance-for-trustees
Industry sources told Reuters they expect the watchdog to
support further payment holiday requests, in line with
government extensions to furlough schemes for companies under
pressure from the months-long quarantine.
A spokesman for the Pensions Regulator said the watchdog
might issue more guidance before the end of June, but did not
give more detail.
As many as 15% of companies have sought a deferral already,
according to the regulator.
Mike Smedley, partner at consultants Isio, said this is
likely to represent a record drop in pension fund contributions.
The companies include threadmaker Coats Group and
media companies Reach and ITV, with more
expected to follow when they publish their next set of earnings.
Bina Mistry, senior director at consultants Willis Towers
Watson, said given loss of earnings due to the economic crisis,
the number was likely to grow: "The longer this goes on, the
harder it becomes."
Industries from travel to hospitality and retail have asked
for and received a three-month deferral to buy time to assess
the economic damage to their businesses. But the real dilemma
for pension fund trustees will be if they come back to ask for a
potentially much longer break.
Pension fund trustees' primary focus is on securing pension
payouts over decades so they do not want companies to go bust,
which would mean reduced payouts for members from industry
lifeboat the Pension Protection Fund.
At the same time, though, they do not want the funding gap
to grow so big that companies struggle to fill it.
"The initial (deferral) requests (were) very much about
helping the company not to run out of cash," said Huw Evans,
director at independent trustee group BESTrustees. He also said
that longer deferrals would "involve trustees doing far more due
diligence as to what they think the future prospects of the
company are."
An important part of that process will involve checking that
companies do not let go of their pensions obligations too
lightly, and that they are also making other cuts, such as to
dividends and management pay.
Some companies may offer security to the pension in case
payments never resume. Martin Hunter, a partner at XPS Pensions
Group, said such security had to be something which gained in
value over time, usually in the form of property.
($1 = 0.7905 pounds)
(Editing by Jane Merriman)
