Firms could use loans for pension funding - PWC

UK - Companies could use corporate debt or bank loans to tackle their pension schemes' funding problems, a conference has been told by a PricewaterhouseCoopers partner.

Terry Simmons put forward the idea at a conference organised by the Pensions Management Institute.

Simmons opened his presentation – ‘Novel approaches to dealing with deficits’ - saying that the majority of pension funds in the UK had a deficit mainly caused by falling equities markets.

Five years ago, he said, it would have made sense for a firm to keep a stand-off attitude to its pension scheme's funding problems. But legislation published by the government in February forbids sponsors to walk away, so “shortfalls will have to be made good at some point”.

Simmons said there could be many ways of tackling the issues.

Introducing a solution based on a theory by Nobel Prize winner Fischer Black, Simmons said that by “moving liabilities from one side of the company to another” brought no change in the financial position of the firm and the pension scheme, but there would be tax-breaks advantages and some cost saving.

The pension fund which could benefit from this should be in deficit, have significant equity assets, pay taxes (making it eligible for tax breaks) and be able to borrow at low cost.

Transferring assets to bridge the pension funding gap would make sense now. Simmons explained his model - giving the example of a company, which issues corporate bonds or asks for a bank loan to aid its pension fund.

Assuming the debt was worth 16 million pounds, the company only need to raise 11 million as it would get back five million in the shape of tax relief.

The relieved pension fund would be 'fantastic' PR with the workers and would reduce the Pension Protection Fund’s levy and there would be a 'gross roll up' in the pension scheme versus net in the company, Simmons also said.

One of the counter arguments would be that the company would exchange known flexible funding for prescriptive funding.

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