Trustees of final salary pension schemes should act to support their sponsor companies during the economic downturn, despite facing a £45bn annual shortfall, according to Aon Consulting.
The firm warns of a ‘triple whammy’ of problems facing final salary schemes and their sponsors, masking the full extent of their losses.
Aon says the economic downturn will have a major disruptive effect on final salary pension schemes which cannot be ignored.
Firstly, as trading conditions become more difficult, trustees may seek higher contributions from the sponsoring employer to make up for its perceived weakness, further damaging the sponsor firm.
Liquidity issues are also problematic, with many companies finding it harder to free-up cash needed to meet their agreed contribution levels.
Lastly, the huge fall in equity markets around the world have caused significant asset losses, hitting the value of schemes.
“Just as employers thought the economic news couldn’t get any worse, they are likely to be hit by more big bills to pay for their pension schemes when they can least afford it,” says Marcus Hurd, head of corporate solutions at Aon Consulting.
“If all final salary pension schemes were assessed for financial adequacy right now, then it is likely that contributions would soar by an additional £45bn a year for the next five years.”
Hurd says trustees should assist their sponsor companies through this difficult time. Rather than simply demanding higher contributions, he believes they should work to make sensible financial plans that ease short-term pressures and ensure the firm can meet its pension obligations in the long-term.
“The sensible outcome may be that companies should in fact be paying less next year rather than more,” he adds.
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