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Pension Fund Deficits Grow By 25% to £93bn
By Nick Bevens, Business.scotsman.com
January 6, 2006
The pension scheme deficits of Britain's top 350 listed companies widened by nearly a quarter last year, according to the actuarial firm Mercer, from £75 billion in 2004 to £93bn.
A 16 per cent rise in the value of the stock market - which boosted the assets of many schemes - failed to offset rising liabilities, said Mercer. The figures follow recent data from Deloitte which estimated the pensions black hole of the UK's FTSE 100 companies had jumped from £65bn at the start of 2005 to £75bn at the year end.
Mercer said the cost of paying pensions has grown because of a longer- living workforce, and also because of lower returns on bonds.
"Favourable investment performance did little to dilute the value of pension scheme deficits in 2005," said Tim Keogh, worldwide partner at Mercer. "Just as people have to pay more to trade up their house after a property boom, despite the value of their current home increasing, employers have to contribute larger cash sums to reduce their pension scheme deficits when all markets rise."
The increased deficits calculated by Mercer highlight the continuing strain on company pension funds and the finances of the employers who run them. The last decade has seen many private-sector final-salary schemes close to new members. Now there are fears that many employers will also start to move existing staff into less generous schemes which are cheaper to finance.
This week, both the Co-operative Group and retail conglomerate Arcadia outlined plans to change their pension schemes for current staff.
Last month, Rentokil became the first FTSE 100 Index business to propose shutting its final-salary scheme to current members, freezing their guaranteed pension benefits at the level they had already built up.
Around one in ten smaller companies is so far thought to have made a similar move, although a much larger number of firms have moved to control rising pension costs by closing final salary schemes to new employees.
The newly set-up Pension Protection Fund (PPF) will also impose an extra cost on pension funds. To finance the PPF, the 8,000 private sector final-salary schemes it covers will have to pay nearly £600m in the next financial year.
Mercer said it suspected that in 2005 additional contributions by big firms were probably not much higher than the extra £5bn in the previous year.
"Our experience suggests that many companies have waited to find out the cost of their PPF levy and the strength of the new funding regulations before they revise their contribution plans," said Keogh.
"Despite some companies making substantial contributions in 2005, often to facilitate a major deal, we have yet to see the radical change in contribution strategy the pensions regulator is probably hoping for," he said.
"Bond markets rose at the same time as equity markets, causing yields to drop and liabilities to grow. The need to allow for increased longevity has been an additional headwind."
Bound by bonds
BOND yields, used to calculate future pension liabilities, fell last year. When yields fall, they increase the projected cost of paying for future benefits, hence increasing deficits.
Firms have shut plans to new staff in hundreds of firms and have started to block existing members from accruing future benefits, such as at pest control company Rentokil Initial.
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