NAPF: A pathway to meet today's funding challenges

Rising mortality rates have been a continuing trend. Today, the average 65 year old will live a further 24 years into retirement, and while on the one hand this should be celebrated, it is inevitably more expensive for defined benefit pension schemes.

One possible solution might be to increase the amount of funding to the scheme

Quantitative easing and its impact on gilt yields have also been a further hindrance to schemes wishing to reduce their deficits.

There are, however, a number of ways that pension schemes can manage these challenges. One of the options is to evaluate the level of benefits paid out to scheme members, which can be actioned relatively easily, especially in a defined contribution scenario. But there are other options available, particularly for DB schemes.

One possible solution might be to increase the amount of funding to the scheme – however, the sponsor may be unwilling to do so, especially if a portion of the current calculated deficit will evaporate as QE unwinds and interest rates rise.

Another option is an asset-backed contribution – a solution which allows an employer to utilise business assets to secure cash which is then paid to the pension scheme.

Companies often find ABC arrangements appealing because they can tackle scheme funding issues immediately but without having to promise a large amount of cash over a relatively short time.

Low gilt yields have been a particular problem for trustees since the financial crisis as liabilities and pension deficits have risen. But market consensus suggests that yields will revert to 'normal’, around 3-4 per cent, as QE is unwound. Should this happen, ABCs, when structured correctly, have the ability to mitigate the risk of trapped surpluses.

The trustee-sponsoring employer relationship is another area which can be better managed. And the 2013 Budget introduced a new objective for the Pensions Regulator to support scheme funding arrangements that are compatible with sustainable growth of the sponsoring employer and fully consistent with the 2004 funding legislation.

Inevitably, trustees and sponsors will come to the table with differing and, at times, contradictory priorities. However, trustees will want to ensure the long-term financial stability of their employer, as this is obviously essential in securing the pension scheme’s future. This common ground should encourage both parties to work together to develop a measured and balanced contributions schedule.

Individually these measures might not provide a magic bullet for scheme funding, but used together they can help pension scheme trustees,the employer and scheme actuary work towards reducing deficits, ensuring the scheme is sustainable in the long term.

Paul Lee is head of investment affairs at the National Association of Pension Funds