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About 60 per cent of employers have been putting less than one month’s profits into their pension scheme each year. In the financial year ended March 2012, companies had put roughly £20 billion into their pension schemes, less than the £29 billion they paid out in interest to lenders and less than a third of the £65 billion paid out in dividends to shareholders.
However, 5 per cent of employers – a group that includes Premier Foods, Thomas Cook Group and First Group – have unhedged pension liabilities that are greater than 100 per cent of their current market capitalisation. Unhedged liabilities are those which are matched by investments in assets that are likely to fall in value when liabilities go up.
Mr Fortes, head of corporate practice at Hymans Robertson, said that recently, many companies and trustees have been taking steps to reduce risk by putting in place hedging tools such as interest and inflation swaps and longevity swaps and investing in assets such as gilts, which generally move with liabilities. The study found that half of all companies had unhedged pension liabilities worth less than 10 per cent of their corporate market capitalisation.
But Mr Fortes warned that although pension costs have been manageable in the 2011-12 financial year, that is likely to change in the current year. He said yields on high quality corporate bonds – which form the basis for calculating pension liabilities for accounting purposes – had collapsed by 60 basis points since the start of this year, which added roughly £60 billion to FTSE350 corporate pension liabilities.