Pensions advisory

Are defined benefit pension schemes barriers to growth?

Jamie MacKenzie Jamie MacKenzie

Businesses often view defined benefit pension schemes as onerous and restricting to growth. It doesn’t need to be that way. Taking a pro-active approach to tackling the defined benefit liability commitments of a company can minimise any detrimental impacts on business growth plans.

Many businesses have paid increasing cash contributions into their defined benefit pension schemes for many years. The financial climate over the last decade means that these contributions are not always reflected in an improvement in the funding position of the scheme, and many employers feel like the contributions are a cash flow drain.

Actively managing the running costs of the scheme, such as the annual PPF levy and the VAT recoverability of scheme expenses, as well as carefully considering the structure of any deficit repayment plan, can optimise the amount and timing of cash flows to reflect the business’ needs.

Defined benefit pension schemes are long-term commitments that need a long-term financing plan. By developing and shaping a strategic plan for your business, you can reduce the size of the liabilities and minimise volatility.

Schemes that are not protected against adverse market movements suffer from market volatility, particularly considering the current low gilt yield environment and financial uncertainty following Brexit. A simple review of the investment strategy can identify changes to the assets, reducing the unrewarded risk, without reducing the expected return.

Additionally, the increased pension freedoms introduced in 2014 create the potential for employer initiatives such as transfer value exercises and pension increase exchange exercises to be more popular amongst members. These exercises can be an effective way of reducing the size and volatility of the pension scheme commitments.

The Pensions Regulator recognises that sustainable future growth of the employer is in the interest of both the business and the pension scheme. Trustees are often supportive of the needs of the business, provided the employer shows a willing and engaged attitude towards the pension scheme, helping them to understand how the scheme will benefit by supporting the investment in sustainable growth.

Taking a proactive approach to managing the defined benefit pension scheme’s commitments is vital to optimise the cash retention and investment in the business, whilst continuing to meet and manage the pension scheme obligations. This helps build a stable and long-term relationship with the trustees and ensures good lines of communication during the funding negotiations, allowing for a more straightforward process.

For more information, or to have a discussion please contact Jamie MacKenzie or Zoe O’Donnell.

Pensions advisory updates
A series of regulatory updates and sector-specific market overviews with a focus on the specific implications for pension schemes.