Defined benefit deficit payback times to lengthen
Depressed gilt yields and economic uncertainty could spur a reversal in the trend of declining recovery lengths.
Companies will have to work harder and take up to three years longer to pay off their defined benefit pension scheme deficits, taking the average repayment period to 11 years for the first time since 2009, new research suggets.
Data from a study of 98 defined benefit pension scheme valuations by PricewaterhouseCoopers suggest that the recent trend of shorter recovery plan lengths - the time it takes to repair a scheme’s deficit - is unlikely to continue through 2012 due to rising deficits and limited availability of cash.
A pension deficit occurs when the level of contributions going into a scheme will not be enough to pay out what is due to retired scheme members in an upcoming period of time.
Average recovery plan length has declined over the last few years, reaching eight years in 2011. However, PwC predicts this trend will reverse in 2012 and recovery plan lengths will increase, perhaps even surpassing the 11-year average from 2009.
The reversal will result from a backdrop of depressed gilt yields and economic uncertainty.
Jeremy May, pensions partner at PwC, said: “The average recovery plan length provides a useful indicator of the state of the industry, but provides only part of the story and masks a wide range of recovery plans. In some cases, companies will need recovery plans considerably longer than 11 years to meet their increasing pension deficit.
“With average recovery plans almost certain to rise again, schemes need to ensure they have a clear justification to present to the Pensions Regulator. This should include a long-term plan for how they are going to manage the risks they are exposed to, given an employer’s ability to fund a scheme in the long term.
“The good news is that there are a number of options for schemes to do this, including increasing non-cash funding and hedging risks.”