Firms’ pensions deficits double
The UK’s largest firms face a pensions blackhole which has doubled in the last year, according to new research.
Actuaries Lane Clark and Peacock revealed in their annual survey of pensions that UK firms are carrying a pension deficit of over £55 billion compared to £25 billion in 2002.
The actuaries argued that firms’ pension funds were being hit by the ‘double whammy’ of falling stock markets and increases in their liabilities under the new rules of FRS17.
Bob Scott, partner at Lane Clark and Peacock, stated, ‘Companies have suffered a double whammy. Equity falls have eroded the market values of scheme assets, whilst an increase in the value of corporate bonds – against which the FRS17 value of scheme benefits is measured – has resulted in a rise in scheme liabilities.’
The survey highlighted seven firms that face financial problems because of the deficits in their pension schemes. British Airways, BT Group, BAE Systems, ICI, Invensys, Rolls Royce and Royal & SunAlliance were most at risk because of the size of their pension funds relative to the company’s size and that their funds where mainly in shares.
The report pointed out that firms such as BP and Smiths Industries have increased their pensions contributions; but even with these increases there is still a shortfall of £600 million going into FTSE 100 pension schemes.
Conservative Shadow Work and Pensions Secretary, argued that the increase in the pension deficit showed the effect’s of Gordon Brown’s tax increases on pension funds.
Mr Willets commented, ‘This is yet more evidence of how serious the pensions crisis has become. Each new estimate about the pensions black hole shows the effects of Gordon Brown’s £5 billion a year raid on pensions since 1997. Employees and employers will now have to dig deep to restore pension security.
He continued, ‘This is why we have called for measures to cut the costs to companies of running schemes, better incentives for people to save, and reform of state benefits so there’s less means-testing.’
Lane Clark and Peacock warned firms that they should not rely on a recovery of the stock markets to improve their situation. The report highlighted that the FTSE would have to rise above the 6000 mark by this time next year to wipe out the deficits.
Chris Tavener, co-author of the report, commented, ‘Without further substantial injections of contributions, some FTSE 100 companies will need a rally in the equity markets to reduce their pension deficits.
‘The FTSE 100 would need to climb to over 6000 by this time next year to eliminate the estimated aggregate FRS17 deficit, but we haven’t seen the FTSE at that level for over two years.’
The new accountancy rules, FRS17, do not allow firms to smooth out stock market volatility from estimates of the value of their pension funds. The survey revealed the new rules meant that for every £80 of assets FTSE 100 firms had, they would have £100 of liabilities.
Lane Clark and Peacock highlighted that firms’ finance directors were being optimistic in their views on future returns which could increase the blackhole further. If finance directors expect better returns they will reduce their contributions to a scheme to boost profits.
