Pearson scheme reaches full funding due to increased employer contributions

The improvement has come following a combination of increased employer contributions and a better-than-expected return on investments.

Pearson's improved funding level was offset by a change to the actuarial assumptions, according to the scheme’s annual report.

The annual report stated: “The estimated improvement over 2013 is largely a result of investment returns on the plan’s assets being higher than assumed and the company contributions, which included deficit payments totalling £56.1m.”

The plan achieved an overall return of 8.8 per cent from all its assets for the year, with 18.9 per cent from return-seeking assets.

The Pearson Group Pension Scheme is provided by the owner of Pensions Expert.

The company and trustee previously agreed a three-year reduction in the scheme’s recovery plan following a jump in funding for its 2012 valuation. The employer is currently paying £40.8m annually until June 30 2017 to fund the deficit.

These contributions are in addition to the employer's £20.1m of regular contributions to the DB scheme. 

A spokesperson for the scheme said the employer would continue to make deficit contributions until 2017, adding: "These will be reviewed as part of the triennial valuation, which will be completed by March 2016."

Experts said schemes approaching full funding may look to alternative funding methods to avoid putting money into the scheme unnecessarily.

Lynda Whitney, partner at consultancy Aon Hewitt, said: “What we’re seeing where schemes are heading towards full funding is a concern around trapped surplus.”

The risks associated with overfunding have not been discussed until recently, said Whitney, as DB schemes focused on reducing their large deficits.

An employer making a contribution to its scheme could expect to pay the marginal corporation tax rate, she said. But money taken out of the scheme is likely to be taxed at 35 per cent.

“Overall it’s not in a company’s interest to overfund the scheme,” she said.

She added that concern around trapped surplus was leading to an increased interest in alternative arrangements, such as Royal Dutch Shell’s recent introduction of a contribution reserve account as its DB scheme reached full funding.

“We’re seeing people looking at alternative financing arrangements to provide security for members without overfunding the scheme,” she said.

Hugh Nolan, chief actuary at consultancy JLT, said any change in employer contributions would depend on the relationship between the employer and trustees, but that often they would carry out a valuation to assess the scheme’s position.

“It depends where the powers lie, but typically you’d expect the employer to bring forward the valuation to see where they stand,” he said.

He added: “The trustees might decide that if the company is putting the money in anyway why not bring some risk off the balance sheet. Without doing a full valuation you might be reluctant to stop money going into the scheme.”