Increase in late payments to pension schemes could signal trouble for employers, says expert

Restructuring expert Jamie White of Pinsent Masons, the law firm behind Out-Law.com, said that it was common for companies in distress to defer pension payments to "buy time" to save the company.

According to figures obtained by Pinsent Masons, there was a 35% increase in the number of late payments to pension schemes flagged by the Pensions Regulator in 2012. Trustees of pension schemes are legally required to inform the regulator when contributions from employers are received late, particularly if they remain unpaid after 90 days and are of "material significance".

"Time and again we have seen in insolvency proceedings that when companies are in distress pension payments are deferred or not paid at all in an attempt to free up cash," White said. "This can buy time but creates - or adds to - a deficit while the business tries to trade its way out of trouble."

"The latest increase does raise real concerns. A proportion of this increase can be put down to the increase profile and vigilance of the regulator and improved compliance by industry – and particularly the insurance companies administering the schemes. However, those factors alone do not sufficiently explain the trend," he said.

The number of late payment reports the regulator received from pension scheme trustees rose from 6,787 in 2011 to 9,172 in 2012, according to the figures. According to Pinsent Masons, this is the highest number of late payment notifications received by the regulator in five years; higher even than the number of delayed employer contributions at the height of the financial crisis.

The Pensions Regulator has the power to impose penalties or even criminal sanctions on companies that do not pay pension scheme contributions in time. Guidance on funding defined benefit (DB) pension schemes in the current economic climate, published by the regulator in April, indicated that companies should carry on funding schemes in accordance with plans already in place unless there had been a "change in an employer's ability to pay".

Earlier this year, the Government asked those involved in the regular valuation of these schemes for their views on whether companies should be allowed to take a longer-term view of projected returns by 'smoothing' the calculation of their assets and liabilities. It has also proposed that the Pensions Regulator be given a new statutory objective to consider the long-term affordability to sponsoring employers of plans to pay back a scheme deficit.

Pension scheme accounting deficits are likely to rise to a combined £100 billion across the UK as a result of low yields from corporate bonds, in which many schemes heavily invest, according to analysis by actuaries Buck Consultants. Companies with a financial year ending 31 March will be required to publish finalised annual reports shortly.

Restructuring expert Jamie White said that although there would be concern around the significance of an increase in late payments, pensioners themselves would receive a certain level of protection in the event of an employer's insolvency. Members of eligible DB pension schemes will receive a certain amount of compensation from the Pension Protection Fund (PPF) if their employer goes insolvent and is unable to pay promised benefits.

"A 'lifeboat' fund does exist to support pensioners where schemes have failed, but if we do see large-scale insolvencies there will be questions around the level of support available," he said.