UK - Companies looking to repair defined benefit scheme deficits will be using assets - more than cash contributions - over the next year, according to analysis by PricewaterhouseCoopers (PwC).

Almost a fifth of FTSE100 companies have now used some form of asset to help plug pension scheme deficits, whether paid directly into the pension scheme or held as security for contingent payment on some future event.

Assets including bonds, brand royalties, real estate, receivables and subsidiaries have been used as security payable in the event of a default or insolvency or paid directly into pension schemes.

Such asset deals were estimated to be worth £8bn over the last year, with a further 30 FTSE100 companies seriously considering them, compared with an estimated £12bn of direct cash contributions.

PwC predicted asset deals would reach more than £10bn in the coming year, with annual deficit cash contributions falling back from their recent spike to less than £10bn.

Raj Mody, pensions partner and chief actuary, said: "We have reached a tipping point whereby asset deals are becoming a primary method of plugging pension scheme deficits.

"Non-cash funding arrangements help bridge the gap between current funding levels and longer-term funding targets, often in an accelerated way compared with more gradual or back-end loaded cash contribution schedules."

But Adam Sutton, valuations director, warned the value of a particular asset could be impacted by different economic circumstances and that it was of paramount importance that asset values be correctly assessed to protect the interests of all stakeholders in a company.

Meanwhile, nearly two-thirds of UK employers will offer workers extra cash rather than pay higher pension contributions if the proposed changes to pension tax relief are implemented, according to a Hewitt Associates survey.
When Hewitt asked 160 of the UK's largest pension schemes how they would react to the proposed tax regime, 61% said they would offer cash benefits above the new annual contribution allowance (expected to be £30,000-£45,000), while 60% of small schemes said they would do nothing and let members pay the tax.
Nearly half of respondents (46%) wanted the government to help individuals avoid one-off tax 'spikes' by providing smoothing through the tax system, by spreading or by averaging the annual allowances over a period such as three years.
Tony Baily, pension consultant at Hewitt Associates, said: "Two themes dominate the finding - the [government's] desire for a reduced annual allowance to stay at the higher possible level and a minimising of the administrative burden.
"The need for simplicity is paramount, even if this means a moderately lower annual allowance is needed, and this has driven our response [to the government's consultation]."

And lastly, Pension Corporation is recommending that schemes considering buyouts act now before the economy deteriorates further, making buyouts even more expensive.

The buyout firm argued that, for much of 2009, it made sense for scheme sponsors to hold off transferring pension risk while expectations were that rising bond yields would improve investment returns, reduce liabilities and lower the cost of pension buyouts.

But with yields falling since Easter and the pace of decline accelerating over the summer months, schemes may wish to reconsider whether they should act now, rather than risking a further rise in liabilities.

David Collinson, pension partner at Pension Corporation, said: "If, as some suggest, it is a 'race to 1%' as the US and UK ape Japan, it could yet get a whole lot worse - for both pension liabilities and for the strength of the sponsor covenant, via reduced operating profitability.

"The cost of pension risk transfer at today's prices will seem a bargain if our economy does turn Japanese."