(January 4, 2013) – Just in the nick of time, American politicians reached a deal to save the economy from falling off the fiscal cliff—but it was narrowly too late for most corporate defined-benefit pension plans in the United Kingdom.
As stock markets rallied around the globe, the bulk of large UK companies had closed their accounting period only a day or so prior, on December 31, 2012. These companies are now stuck posting pension deficits calculated on pre-cliff equity conditions.
Analysts at investment consultancy Towers Watson estimate that for the FTSE 100 as a whole, aggregate deficits totaled £35 billion on 31 December 2012. This marked a slight drop from £39 billion a year earlier, but a generous premium on the £27 billion total following market movements on January 2, 2013.
“Companies may have been able to give investors a more rosy picture if the US ‘fiscal cliff negotiations had not gone right down to the wire,” said John Ball, the firm’s head of UK pensions. “Nonetheless, with deficits having been £48 billion going into the second half of November, the December 31 position may typically be a little better than some had prepared for.”
Total pension scheme assets did not actually increase much on January 2, Ball continued. “Losses on their increasingly large bond holdings will have almost offset the gains on their equities. However, deficits still fell sharply because the liabilities in company accounts look smaller when corporate bonds lose value. This change came too late to include in the disclosures for 2012 which companies will publish over the next few months: accounting numbers are snapshots representing market conditions at the time they are taken.”
The picture is even worse across the Channel: The drop in corporate bond yields in the Eurozone has been roughly three time as steep as in UK. As the yields have plummeted, liabilities only continue to rise.
“Corporate bond yields have been coming down around the world,” said Ball. “In the Eurozone, they have fallen off a cliff. As a result, some European companies face having to report that pension obligations are making a much bigger dent in their balance sheets than they disclosed a year ago.”
Ball had encouragement for firms with long-range liabilities, which he said will be somewhat protected by stable and long-term corporate bond yields.
That’s no consolation for a weak finish to the fiscal year end—but at least 2013 will for many get off to a stronger start.