LONDON (Citywire) - Companies with pension schemes that are in surplus could start moving funds to other vehicles to avoid money being trapped in the schemes, according to pension consultants Watson Wyatt.
Chinu Patel, senior consultant at Watson Wyatt, said: “If the pensions deficit is volatile that’s a good reason for doing this. There is the danger that pension schemes are losing out on the downside risk and not getting anything back on the upside risk.”
Aon Consulting figures show that the pensions deficit across the 200 largest pension schemes had fallen to 14 billion pounds in April and that a third of these schemes are now in surplus.
Many occupational pension schemes can not extract surplus funds and those that can are subject to expensive tax penalties.
Patel said that under pensions legislation, extra funds are not classified as ‘surplus’ until benefits are paid out to the maximum permissible Inland Revenue limits, which are generally far higher than benefit levels that employers agree to pay scheme members.
After tax is paid the surplus that could be withdrawn would be negligible, according to Patel.
One solution would be cutting contribution levels to offset the surplus. But reducing contributions across older schemes with few active members and dwindling contributions would have little impact, said Patel.
Patel said that companies that these schemes could put any additional funds into a contingency funding solution.
Contingent assets include escrow accounts, letters of credit, charges over fixed or floating assets, parental company guarantees, special purpose vehicles and various forms of insurance.
Schemes would be able to use surplus funds in contingency solutions depending on the type of asset class that the vehicle has invested in. Funds could then be used by the businesses for various investments such as purchasing property for the company.
Patel said: “It’s not happening already but it’s something that we envisage could happen if the stock market continues to recover and if employers continue to put more money into the scheme.”
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