This working party is now closed.

 

The working party have considered the interaction between defined benefit pension scheme funding and other calls on an employer’s cash flow, focusing on key areas of covenant leakage as defined by the Pensions Regulator. Whilst the main focus was on the payment of dividends to company shareholders, the working party also considered of intra-group company loans, the transfer of business assets at less than fair value, the level of senior management pay, and other mechanisms which move cash from the employer to beyond the reach of the scheme.

In addition the working party considered the appropriate balance; how it is affected by different factors; how it is perceived by different stakeholders, and what the impact is on a company (and ultimately the pension scheme) of varying that dividend policy.

The working party considered the evidence for and against the detrimental effects on companies of increasing their deficit contributions to pension schemes, at the expense of dividend payments, and whether that might be ultimately counter-productive to members receiving their benefits.  This included looking at established business norms and how these might vary by sector or ownership structure.

Actuaries do not usually provide direct covenant advice to clients.  Consequently, the working party focused on what working knowledge could be useful to actuaries in these circumstances in order to carry out their roles.

Progress to date: 

The outcome of this analysis has formed the basis of a paper providing Scheme Actuaries, employer appointed actuaries, and actuaries working in investment with a more in depth understanding of the priorities and relationships between defined benefit deficit reduction contributions and different tupes of employer cash flows.  This should benefit such actuaries in their role as a trusted pension scheme advisor, and enhance the collaborative discussions that take place around funding strategies, investment strategies and covenant strength as part of their scheme funding discussion.  

Working towards:

The working party are due to present their findings at the Pensions Conference 2020 in June.  The group will also consider opportunities to discuss their findings further and to reflect on the implications of upcoming consultations on the revised code of DB funding.

Outputs:

Current Chair Jane Ralph
Membership 7
Established 2019

 

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For more information about Pensions working parties contact the Communities Team.

professional.communities@actuaries.org.uk

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