A tenth of Britain’s biggest companies are saddled with final salary pension schemes that dwarf their market value, according to a worrying report.Amy Wilson of the Telegraph reports, UK's biggest companies are carrying £73bn pension deficit:
Consultancy firm Pension Capital Strategies will this morning reveal that ten members of the FTSE 100 now have retirement plans greater than the size of the firm.
But for British Airways, BT and engineer Invensys the situation is more unsettling still, with their pensions liabilities now more than twice the market capitalisation of the groups.
The study shows that the combined deficit on FTSE 100 retirement plans stood at £73bn at the end of June – a £17bn improvement on last year’s level after a bounce on the stock market.
The PCS’s report is just the latest to highlight the dire predicament facing some of Britain’s best-known companies as they try to reconcile the rising life expectancy of their workers with increasing turbulence on financial markets.
Actuarial firm LCP last week reported that the total deficit on FTSE 100 pension schemes had reached £51bn by the end of 2009.
Faced with these gigantic shortfalls on their pension schemes, companies have been forced to pump in unprecedented sums to ensure they have enough to pay employees in retirement.
These emergency ‘deficit contribution’ payments tripled from £4bn to £11.8bn last year, according to PCS.Oil giant Royal Dutch Shell led the way with a £2.7bn emergency top-up payment, said the PCS, while Lloyds Banking Group, Royal Bank of Scotland and Unilever all funnelled more than £1bn extra into their final salary pension schemes.
Companies are resorting to increasingly novel methods to plug pension deficits. Drinks giant Diageo has put whisky stocks into its scheme, while Tesco, Sainsbury’s and Whitbread have all pledged property assets to their retirees.
The aggressive move into bonds was partly due to the shift into liability-driven investing, and part overreaction to the financial crisis of 2008. But with so much uncertainty, mature pension plans in the UK aren't taking chances. They're hunkering down and reducing volatility.
The total pension deficit of the FTSE 100 was an estimated £73bn at the end of June, according to research by Pension Capital Strategies (PCS), a division of insurance broker Jardine Lloyd Thompson. That is a £17bn improvement on a year earlier.
However, "there has been a noticeable growth in the number of FTSE 100 companies where the pension scheme now represents a material risk to the business," PCS said.
BT, British Airways and Invensys all have pension liabilities which are more than double their market value, at £43bn, £16.8bn and £5.4bn respectively, PCS data shows.
Only five companies in the FTSE 100 disclosed a pension surplus in their most recent accounts, the research revealed.
However, funding of pension deficits increased "very significantly" in the year to June 30, with total payments of £11.8bn, up from £4bn the previous year.
Shell was the biggest contributor, paying £2.7bn towards its deficit. Another 57 companies in the FTSE also made funding contributions.
The flight by pension funds from equities to bonds - perceived as a safer investment - has come to an end, with the average pension scheme's asset allocation in bonds at 49pc, the same proportion as last year.
In 2009 there was a significant move to bonds, up from 41pc of allocation in 2008, and 35pc in 2007.
Finally, the BBC reports Experts warn pension changes a 'nightmare':
A group of pension industry experts have attacked plans to link private pension increases to the Consumer Prices Index measure of inflation.
They say many pensioners have been promised Retail Prices Index-linked annual increases and retrospective legislation could breach human rights.
Philip Read, chairman of British Coal pension trustees, says this could be a "potential nightmare".
But the government says public and private pensions need to be consistent.'Potential nightmare'
Members of an online forum for pensions experts, Mallowstreet, have written to the government, claiming the change has been imposed on the industry and a full consultation period is required.
CPI increases have tended to be lower than RPI in recent years.
Last month the government said private occupational pensions would be linked to CPI instead of RPI.
Ministers had already announced CPI would be used in future to uprate state benefits instead of RPI.
The experts on the online forum also include Andrew Swan, from M&G Investments, and Karen Wake from ACE insurance.
Pensions are already a nightmare in the UK, and they risk becoming a nightmare on this side of the Atlantic too. The pension bell tolls are ringing, and people are finally paying attention. Only problem is it might be too late.