Example of trustee assessment of maximum affordable contributions
A. N. Example Pension Scheme
The trustees have assessed the reliability period as: 5 years
The maximum affordable contributions after deducting deficit repair contributions (DRC) over this period total: £2,989,750
The following table summarises the key inputs and assumptions in reaching this figure:
| Free cash flows | DRCs | Investment in sustainable growth |
Shareholder distributions | Payments to other DB schemes |
Other, discretionary costs |
Maximum affordable contributions |
|||
|---|---|---|---|---|---|---|---|---|---|
| FY22 | Previous year | 2,400,000 | (1,500,000) | - | (250,000) | - | - | - | |
| FY23 | Reliability period |
Current year | 2,500,000 | (1,500,000) | (500,000) | (250,000) | - | - | 250,000 |
| FY24 | Yr1 | 2,300,000 | (1,500,000) | (500,000) | (250,000) | - | - | 50,000 | |
| FY25 | Yr2 | 2,600,000 | (1,500,000) | - | (275,000) | - | - | 825,000 | |
| FY26 | Yr3 | 2,700,000 | (1,500,000) | - | (302,500) | - | - | 897,500 | |
| FY27 | Yr4 | 2,800,000 | (1,500,000) | - | (332,750) | - | - | 967,250 | |
| Total over reliability period | 12,900,000 | (7,500,000) | (1,000,000) | (1,410,250) | - | - | 2,989,750 | ||
Source:
- Forecast free cash flow, sustainable growth and shareholder distribution information was obtained from management on 22 August 2023.
- No other forms of covenant leakage, discretionary payments or payments to other DB schemes were identified.
- Key adjustments were discussed with management on 12 September 2023 - as set out below.
Assumptions:
- Investment in sustainable growth in current year and next year relates to new production lines which are forecast to improve employer production and cost efficiency in year 2 onwards.
- Increased production and cost savings are expected to increase sales and market position and will improve covenant support.
- This investment is expected to complete by the end of next year and will drive a steady increase in the level of employer free cash flows in the following years.
- No other investments in sustainable growth projects are anticipated.
- The trustees consider that shareholder distributions would not be reduced by management to support scheme funding in the event that the scheme required additional contributions.
- Following a period where dividends were kept fixed to partially fund sustainable investment (discussed above), these are expected to increase by around 10% per annum in the future.
- The net impact is that, despite limited levels of 'maximum affordable contributions' in the next two years, this should increase substantially from FY25 onwards.