UK Pension Liabilities Largest Ever Relative to Market Cap.

The pension liabilities of the FTSE 350 have reached 35% of their sponsoring companies’ combined market capitalization, the highest proportion ever.

(July 2, 2012) — The aggregate pension liabilities of the 350 largest companies listed in the United Kingdom have hit record levels, equivalent to 35% of their sponsors’ market capitalization, consultancy Aon Hewitt has contended.

As of June 30, the liabilities of the UK defined benefit pension plans were £570 billion ($914 billion), an increase of more than 20% from March 31, 2011, Aon Hewitt said. At the same time, the market capitalization of the FTSE 350 declined from £1.7 trillion at March 31, 2011 to £1.6 trillion.

“When we look at the figures, it’s evident why final salary pension schemes are posing such financial headaches for their sponsors,” said Marcus Hurd, principal and actuary at Aon Hewitt. “When the final salary pension scheme liability is over a third of the FTSE 350’s market capitalization, there’s no wonder that small changes in pension schemes are having a disproportionate effect on the sponsor’s finances.
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This situation is partially due to low interest rates that inflate benefit obligations and weak equity markets that haved depresssed returns.

“Pension scheme liabilities have increased by 18% since March 2011 while the market capitalization of the FTSE 350 has actually fallen,” said Hurd. “It is the rising liabilities of these pension schemes that are causing the pain.”

Pension experts in the UK and abroad have pushed for regulatory relief for corporate defined benefit plans, arguing that rock-bottom interest rates are causing an explosion in pension liabilities that is threatening to overwhelm plan sponsors. Last month, Steve Webb, the United Kingdom’s pension minister, called for changes in accountancy standards that would grant pension plans leeway to modify the discount rate that they use to calculate liabilities.

Last month, Danish and Swedish regulators permitted their countries’ pension funds to raise the relevant discount rate, offering relief to pension plans that are squeezed on both sides by low interest rates and a moribund European market.

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