Final salary pension schemes
14th January 2008Is the employer willing and able to fund the scheme?
Although thousands of pension trustees are responsible for the smooth-running of their schemes, few can be sure that the sponsoring employer is willing and able to meet continuing scheme liabilities. Failure to assess this could leave trustees liable to claims of negligence, if the employer defaults.
Christopher Murray, a director at Smith & Williamson, the accountancy and financial advisory group, highlights the importance of evaluating the employer's financial position.
"Any trustees who have been faced with a recent actuarial valuation of their scheme will know that identifying the scheme's "technical provisions", in order to set a scheme-specific funding objective, must go hand-in-hand with assessing the employer's ability and willingness to fund the scheme into the future i.e. the strength of the sponsoring employer's "covenant".
It would be unwise to select a funding objective that is based on potentially optimistic (yet still acceptably prudent) actuarial assumptions, unless the employer's covenant is pretty strong. Even then, the Pensions Regulator might well ask questions, so it is important to be able to come up with some satisfactory answers.
The Regulator does not set out to force companies into insolvency by insisting on shorter deficit reduction ("recovery") periods than might normally be considered "reasonable" by sponsoring employers, but if trustees activate any of its published "triggers" (for example, by agreeing to a recovery period of greater than 10 years) they need to have good justification for doing so.
Having recently attended one of The Pensions Regulator's excellent workshops, it is clear that the strength of the employer's covenant is rather more important than many trustees might have thought. The financial relationship with any parent or group company will also have a significant bearing on how strong a funding plan must be. Any change in the perceived strength of the employer's covenant should be considered by trustees, in case there is a need to adjust the funding plan. Regular review is therefore essential.
Real potential for conflict exists within trustee boards that are comprised mainly of senior management of the sponsor. It is even more important in such situations to be able to demonstrate that a covenant assessment has been made, so independent third party analysis should be high on the agenda.
Some firms of Chartered Accountants offer a covenant review service, typically led by corporate recovery teams, who are perhaps better placed than most to form an opinion about whether or not an employer is likely to be able to meet its financial commitments, of which pension scheme funding is one.
Whilst there is no legal requirement to have the employer's financial position evaluated by a third party, few trustee boards possess the necessary accounting skills to be in a position to make a valued judgement. Failure to assess the ability and willingness of the employer to meet its scheme funding commitments can leave trustees exposed, if things go wrong."
Christopher Murray APMI
For further information:
Christopher Murray, director
Tel: 0203 8082 7600
Email: Christopher Murray
Press enquiries:
Samantha Greenwood 0203 8082 7600 or
Kate Harrison 0207 131 4228
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors
Smith & Williamson is an independent professional and financial services group employing over 1,400 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Bristol, Glasgow, Guildford, Maidstone, Salisbury, Southampton and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.
Smith & Williamson Financial Services Limited
Authorised and regulated by the Financial Services Authority.
