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 and how they will affect your business throughout the coming year.
My professional opinion is that the problems associated with final salary pension schemes are likely to continue and will weigh heavy on UK businesses in 2007.
Thanks to the FRS-17 accounting standard, pension deficits are showing up very clearly on balance sheets, putting pressure on sponsoring companies to take action.
Growing numbers of companies have been prompted to close their final salary pension schemes to new members while moving to defined contribution plans that put the 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’ in accordance with 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, trustees must negotiate with the employer to agree a strategy and timeframe for balancing the books.
Many trustees could have to make difficult judgement calls. For instance, if a scheme is in deficit, an obvious way forward is to call on the employer to contribute more. But what if that extra contribution breaks the company?
Plus, there is the potential for conflicts of interest. Let us say a company’s finance director is also a trustee. When the trustees meet to discuss funding targets, where do their sympathies lie? To avoid such conflicts, we could see more directors standing down from trustee roles.
Tighter regulation will probably add to pressure on companies to retreat from final salary schemes but that does not 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.
For further information on this and other pensions-related issues, contact David Knapman at 01908 687800 or david.knapman@bakertilly.co.uk.
For more information, visit www.bakertilly.co.uk“
