05 May 2015

Financial Times: UK’s largest companies under pressure over pension contributions

Some of the UK’s largest companies will come under pressure to ramp up contributions to their company pension schemes, advisers warn, as deficits continue to soar.

Advisers say that since the last round of valuations three years ago, deficits have worsened — despite the improving economy — largely in response to falling gilt yields which are used to calculate scheme liabilities.

The total deficit in FTSE 100 pension schemes was estimated to be £80bn at the end of 2014, £26bn higher from the same time a year ago, and up from £73bn in March 2012, according to JLT Employee Benefits, a pension and benefits consultancy.

“The lower gilt yields go the bigger scheme deficits tend to grow,” said Charles Cowling, director with JLT.

“Three years ago we thought interest rates were low and it was a bad time for markets, but it’s just got worse.”

Companies scheduled to have their actuarial valuations this year include Lloyds, Shell, BP, International Airlines Group (British Airways), HSBC and Aviva.

During these valuations, employers agree a recovery plan with trustees, acting on behalf of scheme members promised a pension, to plug any funding deficit.

“We expect to see some difficult negotiations between trustees and employers and inevitably there are going to be demands for (potentially significant) increases in employers’ funding contributions as pension scheme deficits continue to grow,” said Mr Cowling.

According to JLT, FTSE 100 companies ploughed £14.1bn into their pension schemes over the last accounting year, down from £16.3bn in the previous year. However, only £6.9bn actually went to cut deficits, as new pension benefits accrued, down from £9bn the previous year.

The squeeze on contributions follows the Pensions Regulator’s move in 2012 to give employers with scheme funding gaps greater flexibility to stretch out their deficit recovery plans.

The Confederation of British Industry, which represents employers, said: “In all cases, due regard must be given to the Pension Regulator’s new objective — to consider the company’s ability to contribute. The best security for any defined benefit scheme is a solvent, profitable sponsoring employer.”

The aggregate deficit of the 6,057 schemes in the PPF 7800 index was estimated at £292bn at the end of March 2015, up from £248bn the previous month. There were 4,995 schemes in deficit and 1,062 schemes in surplus.

© Financial Times