Combined defined benefit
(DB) pension scheme deficits of the UK’s top 100 listed companies
(FTSE100) improved markedly at the end of June, falling by £17bn
($26bn) compared with June 2009 to £73bn, reports consulting firm
Pension Capital Strategies (PCS).
The reduction was driven primarily
by a significant increase in the funding of pension deficits, with
the total amount pumped in by 58 companies increasing from £4bn to
£11.8bn.
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However, the significant increase
in deficit funding contributions was accompanied by a marked
decline in the provision of ongoing DB pensions, which fell by 15%
from £7bn to £6bn.
PCS believes that the majority of
FTSE 100 companies will cease DB pension provision to all employees
within two to three years.
PCS found that in their most recent
annual report only five FTSE100 companies (Old Mutual, Prudential,
British Land, Man Group and Investec) disclosed a DB pension
surplus, 80 companies disclosed deficits while 15 companies have no
DB pension liabilities.
PCS estimates that only 3 companies
would disclose a surplus if they had a year-end of 30 June
2010.
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By GlobalDataAccording to PCS, in the 12 months
to June 2010 the total disclosed pension liabilities of the FTSE
100 companies rose from £378bn to £434bn with 14 companies
disclosing pension liabilities of more than £10bn. The largest
deficit was that of BT with disclosed at £43bn.
If pension liabilities were
measured on a risk-free basis rather than using an AA bond discount
rate, the total disclosed pension liabilities of the FTSE 100 would
increase from £434bn to around £525bn, and the total deficit at 30
June 2010 would be around £170bn, noted PCS.
Unsurprisingly, PCS stresses that
there has been “noticeable growth” in the number of FTSE 100
companies where the pension scheme now represents “a material risk
to the business.”
Ten FTSE 100 companies have total
disclosed pension liabilities greater than their equity market
value while for British Airways, BT and Invensys total disclosed
pension liabilities are more than double their equity market
value.
How many companies will dig there
way out of their DB pension fund deficits is uncertain but for many
there appears little hope based on their current investment
strategies.
PCS revealed that there has a
general shift from equities into bonds, with a large number
companies reporting “very significant individual changes to
investment strategies.”
One of the most marked changes was
that of insurer Aviva which increased its exposure to bonds from
56% to 69%.
At the end of 2009 Aviva reported a
DB pension deficit of £1.71bn and pension liabilities of
£11.8bn.
Also reporting a high bond
allocation was Prudential, with bond exposure at 75%, the sixth
highest of all FTSE 100 companies. Prudential reported a DB pension
surplus of £338m at the end of 2009.
The scale of the FTSE100 DB deficit situation is clearly way
beyond the capacity of the UK’s risk transfer market which had by
the end of the first quarter of 2010 executed pension scheme
buyouts, buy-ins and longevity swaps totalling £22.3bn since it got
going in earnest in 2006.
