There is no better time than the present to get your pension planning right, says Baker Tilly director and pensions specialist Gary Grewal
THE start of a new financial year is a great time for strategic planning – an opportunity to assess progress made and to set new targets that will take your business to the next level.
But, as well as looking at boosting sales, recruiting or making an acquisition, it is also important to look at some of the external factors influencing your operation. One of the key areas for consideration has to be pensions.
My professional opinion is that the problems associated with final salary pension schemes are likely to continue throughout the rest of 2007.
Thanks to the FRS-17 accountancy standard, pension deficits are showing up very clearly on balance sheets, putting pressure on sponsoring companies to take action.
In the past, this has prompted growing numbers of companies to close their final salary pension schemes to new members, while moving to defined contribution plans that put the funding risk on the employee rather than on the organisation. This trend is likely to continue.
Meanwhile, the new Scheme Specific Funding regulations – as introduced by the Pensions Regulator – are now in force. Replacing the old Minimum Funding Requirement, the new rules require the trustees of each defined benefit scheme to issue a bespoke “statement of funding principles” to the 2004 Pensions Act.
This is a major change. To provide the regulator with the necessary information, trustees must be fully conversant with the financial position of the scheme in question. This means understanding the investment strategy, the assumptions that lie behind the funding projections and the financial position of the sponsoring company.
What’s more, if there is a deficit, then trustees must negotiate with the employer to agree a strategy and timeframe for balancing the books.
Tighter regulation will probably add to pressure on companies to retreat from final salary schemes, but that doesn’t mean we will see the end of defined benefit plans.
A solid pension scheme is still a tremendously important recruitment and retention tool and while final salary plans may be too expensive, average salary schemes are providing a more affordable and less risky alternative.
Interest in the average salary option is likely to increase over coming months.