Many companies in the UK provide employees with a pension, but the pension funds are in deficit. The companies concerned have to make up these deficits in increased cash contributions. Also by securing the company’s assets in favour of the pension fund.
These deficits are often large, and certain to keep growing in scale. They are in danger of becoming increasingly unmanageable. There are various reasons for this, often nothing to do with the companies themselves, but with external factors beyond their control. There is also increasingly a conflict between the “best” investment options for the Trustees of the funds, and what may be reasonable and prudent or even affordable for the contributing companies.
Consequences for Companies and Directors
Directors of such companies could also face personal liability for these shortfalls. It is crucial that Directors and indeed Shareholders are aware of these very serious risks. Furthermore, that they take professional advice as early as possible – and certainly once the company starts coming under pressure from the Trustees or is being threatened with legal action.
A hugely important consequence of the nature of these shortfall liabilities is that they can be practically impossible to quantify. The valuation is affected by accounting policies and assumptions as applied by pensions actuaries. These are different to normal company accounting policies. The effect can be to increase substantially the size of the company’s potential or contingent liabilities to the pension fund. The true scale of which may not even be apparent to the company’s own accountants applying normal accounting principles.
That also affects the valuation of shares in such companies and their marketability. It may well affect an investor’s exit route from these companies.
Burdens on Contributing Companies
The burdens on contributing companies are likely to reach a point where the companies could face collapse, from increasing levels of contribution, which for many are unsustainable over the longer term. This will likely result in the winding up of the schemes and shortfalls being established at what could be very high levels.
The contributing companies will face demands that the shortfalls be paid; and a real threat of legal enforcement action – including winding up of those companies.
Additionally, this will inevitably result in some reduction in pensioners’ benefits, even if the companies concerned are liquidated and their assets applied to reduce pension scheme shortfalls.
So for a number of reasons Directors and Shareholders in companies which operate pension schemes need to take professional advice. If you feel you need to discuss this, why not contact us?
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