Fifth of sponsors may suspend pension deficit contributions

A new study suggests that UK pensions funds could currently be seeing £200 million per month of deficit contributions going unpaid. According to the research from Isio, 12% of sponsor companies have already requested to suspend deficit reduction contributions, while 7% are currently considering the option.

Political and economic volatility were already impacting heavily on the UK’s pension funds before 2020. The deficits of some of the nation’s largest pension schemes were worryingly high at the turn of the year, while liability values looked set to take a beating in the event of an economic slowdown tied to Brexit. The first quarter of the year saw these pressures notably exacerbated by the outbreak of the potentially deadly Covid-19 virus.

One of the biggest impacts that the pensions sector may face from the pandemic is the economic slump it has ushered in, making it more difficult for fund members to make deficit reduction contributions (DRCs). DRCs are extra payments contributors can make to reduce the shortfall of funding in a pension scheme. Such payments may reduce a contributor’s scheme-based levy, providing they have certified them correctly, however, in times of economic hardship many may struggle to find the funds for DRCs.

According to a poll by pensions expert Isio, which surveyed of over 380 trustee and corporate clients, almost one-in-five pensions trustees have suspended DRCs since the onset of the Covid-19 pandemic, or were likely to do so soon. In 12% of cases the sponsor company had already requested DRC suspensions, while a further 7% of sponsors said they were considering DRC suspensions, but have not yet approached the trustees – which could lead to a total 19% of sponsors suspending DRCs.

Of the suspensions already in place, 6% had been accepted by trustees with another 6% under consideration In the vast majority of cases to date. In over 95% of those considered, the trustees had accepted the sponsor’s request, suggesting that if the 7% weighing up this option were to take it, the vast majority of them could be approved.

If the survey is taken at face value, and 12% accurately applies across the UK that equates to circa £200 million per month of deficit contributions being unpaid. While this strain may largely be limited, as 63% of suspension requests Isio surveyed were for three months or less, nearly a quarter also requested asked for a six-to-12-month extension in situations where other creditors commit to support for longer periods and restrictions on trustee extensions would limit that support.

Mike Smedley, Partner at Isio, commented, “The findings of our client survey clearly show that trustees are heeding the advice of TPR and accepting a reduction or suspension of DRCs where required. Trustees are right to take decisive action and be flexible during the current market environment, but they need to remain diligent and monitor the situation closely. With two thirds of suspensions requests only seeking a short-term relief from DRCs, we expect further conversations to occur in the coming months and weeks as trustees seek to implement creative longer-term solutions.”

Formerly KPMG’s UK pensions practice, Isio was launched in March 2020 with the aim of delivering clear, simple pensions and investment advice in a more personal way. Backed by technical expertise and underpinned by proprietary technology, the firm which combines actuarial expertise, third party administration, investment consulting and defined contribution specialism to deliver better outcomes for pension scheme sponsors, trustees and members.