Pension deficit and risk management

The Issue

A large defence contractor wished to analyse the financial risks posed by its significant historical pension schemes and understand the options available for mitigating these risks and controlling future costs. These costs were material relative to the earnings of the business and yet were largely related to former employees of the company.

Our Approach

PwC’s pension team was engaged to carry out a detailed review of the company’s current pension position. Pension modelling tools were used to forecast the future balance sheet, P&L and cashflow impacts of the schemes under various economic scenarios.

After ensuring that the client had a full understanding of the significant risks exposed by the modelling exercise, a further review of risk mitigation and cost reduction ideas was carried out. The client was then able to pursue a risk reduction exercise based on full information.

The Outcome

The company is now fully aware of its exposure to pension scheme risk and is better placed to make long-term strategic decisions. Strategically, the business saw that reducing the balance sheet risk of the legacy liabilities was a priority and undertook a major exercise that saw a decrease in pension liabilities of over £20 million. It then implemented various risk mitigation ideas that stabilised ongoing pension costs as part of a new, wider employee deal.