Survey: Pension Deficits for One in 10 FTSE Firms

The total disclosed pension liabilities of FTSE-100 firms has skyrocketed to £410 billion from £382 billion in the past 12 months.

(May 21, 2010) — Nearly one in 10 blue-chip FTSE-100 companies face looming pension scheme deficits that threaten the future of the business, a new survey finds.

According to the survey by Pension Capital Strategies in association with investment bank group JP Morgan Cazenove, only five FTSE-100 pension funds are in surplus with nine of Britain’s biggest listed companies facing pension liabilities greater than their stock market value, representing a “material risk” to its business.

Those nine companies include BAe Systems, Royal Bank of Scotland and insurance group RSA. British Airways and BT are in the biggest pension holes as they confront liabilities that are more than three times their equity market value.

The report titled “FTSE-100 and Their Pension Disclosures” predicts that final salary pension schemes at top companies could end within three years. And while total service cost — the cost of providing the current year’s pension obligations — continues to drop as the number of workers who are earning final salary benefits declines, final salary pensions in the private sector could be obsolete within six years.

Additionally, the survey discovered that pension funds did not take advantage of soaring equity markets in the year to the end of March because schemes have continued to switch their investments into bonds as employers strive to cut the investment risks in their pension schemes. While the average pension scheme allocated 34% to bonds three years ago, that percentage has now risen to 50%.

“Companies and trustees are continuing to switch pension assets out of equities into bonds despite the recent massive rally in equity markets. Liberty International is the latest company to report a big switch, increasing their bond allocations by 45%,” the report said. “Moreover, company disclosures reveal little of the extensive activity there has been by a number of companies to reduce mismatching risk by LDI (liability-driven investment) strategies, which frequently make use of derivatives and other financial instruments.”

Despite of mounting profit and cash flow pressures among pensions, the study also revealed there has been a significant rise in deficit funding. Last year, deficit funding totaled £11.1 billion, up from £4.4 billion the previous year, an increase of more than 150%. Nevertheless, total deficit of FTSE-100 companies stands at £66 billion, which has not changed in the past year.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742