Final salary pension schemes look for protection

As final salary schemes continue to close, trustees and scheme sponsors will be reviewing their options.

Despite the potential within the liability reinsurance market, cash-strapped schemes are warily looking for alternatives.

In a statement last week the Pensions Regulator urged trustees to secure support from their sponsoring employer.

‘Pension scheme trustees are looking at the strength of their employers and deciding how much protection they should build into their valuations,’ says Lorant Porkolab, senior consultant in Punter Southall’s covenant consulting practice.

‘One way to do this is by taking charge of contingent assets. This allows trustees to take charge over assets, so if the firm goes bust the scheme will be in the pecking order of creditors. Another way is profit sharing, where trustees get a regular top-up and, on the more complex side of the spectrum, special purpose vehicles.’

Special purpose vehicles in practice

Porkolab points to the example of Whitbread which in May joined M&S, J Sainsbury’s, ITV and John Lewis in setting up a special purpose vehicle (SPV) in order to generate funds for its DB scheme.

In these cases the SPV obtained security over properties already owned by the company and a share in the profits generated by their lease.

Pension buy-ins and buy-outs, of the sort offered by Pension Corporation, require a much bigger funding position, said Porkolab.

In the Whitbread example, the scheme had around £30 million in liabilities which would have been too big to offload.