Royal Dutch Shell Plc  .com Rotating Header Image

Red alert for pension plans: Top schemes have gone into debt

Scotland on Sunday

Red alert for pension plans

Top schemes have gone into debt, writes Teresa Hunter
PENSION schemes run by the UK’s top 100 companies have plunged £41bn into the red, raising fears over the future of remaining high-quality retirement plans.

This is the largest downward swing since the dotcom bust six years ago, and comes after last July’s positive £12bn balance. The plunge comes despite companies pumping an additional £40bn into them, and reducing risk by cutting their exposure to the stock market from 59% to 53%.

For example, Rolls-Royce Group paid in £500m to allow it to reduce its equity holdings by half, and buy financial instruments which would protect the fund against inflation and interest rate movements.

Bob Scott, a partner at Lane Clark & Peacock, the firm of actuaries which compiled the report, said: “UK pension schemes enjoyed a brief period of surplus until early in 2008. No sooner have companies breathed a sigh of relief about returning to surplus but they are back to multi-billion pound deficits. 

“With a possible recession looming and the threat of further regulatory intervention, the outlook for continuing salary-linked final salary pensions seems rather bleak.”

The funds have been hit by falling stock markets, rising life expectancy and a tougher accounting environment. They continue to suffer an increased tax burden following the scrapping of dividend tax relief a decade ago, which removes an extra £5bn annually. Against this background, companies have closed final salary schemes to new members, with only five – BP, Diageo, ITV, Tesco and Vedanta Resources – acknowledging they still have schemes open to new members, and even these may not be freely available to all employees. Diageo has a pension shortfall of £402m on its outstanding pensions bill of £5bn.

Taylor Wimpey has stopped future salary-linked pensions benefits available to all staff in one of its funds, joining Rentokil and Enterprise Inns, whose employees have already been hit. British Airways and ITV have altered their terms including raising the retirement age. ITV has also increased staff contributions and reduced benefits.

Final salary pensions are now only widely available in the public sector.

British Airways’ pensions liabilities are three times bigger than the size of the company, with £15bn promises outstanding, and a market capitalisation of £5.5bn. It has the second biggest shortfall at £1.3bn.

BT comes next with the biggest liabilities of all at £39bn against a company worth of £29bn. British Energy Group has liabilities of £2.7bn against its £2.3bn price tag.

BAE Systems has the biggest single black hole of £2bn, and the pensions bill is bigger than money in the kitty. But its overall liabilities, at £17.1bn, are slightly lower than the company’s £17.4bn worth.

Royal Bank of Scotland has the third highest pensions liabilities at £27bn but the fund is £340m in surplus. This compares with HBOS, which has a significantly smaller burden at £7.2bn, but is still £294m short. HSBC is £953m short of the £15bn it needs to meet its pensions promises, with Lloyds TSB £683m light of its £16bn bill. Standard Life has a £203m deficit on £1.3bn liabilities.

Tui Travel has the biggest shortfall compared with the value of the company, with its £602m black hole reflecting 37% of its stock market price. British Airways’ £1.3bn deficit is 23% of the company’s value. Thomas Cook Group comes next with a £176m deficit, worth 12% of the firm. Also in the top five, Taylor Wimpey’s £216m deficit is 10% of its £2.1bn market cap, and Whitbread’s £196m, 6% of its £3.2bn value.

Employers putting staff ahead of shareholders by paying the biggest contributions into their staff pensions compared with dividends to shareholders include Sainsbury, Marks & Spencer, BAE, First Group, RSA and Tui Travel. 

But overall the biggest employer contributions were made by BT, Unilever, Rolls-Royce, HSBC, Royal Dutch Shell and Marks & Spencer.

Employees with least to worry about at this point in time, because their pensions are well funded, include those at GE, whose scheme has a 29% surplus, EMC with a 24% surplus, Mitsubishi with a 22% surplus, Royal Dutch Shell, with a 22% surplus, Hewlett Packard and IBM, both with a 13% surplus.

Finally, those with the highest exposure to equities are IBM, Du Pont, Boeing, National Grid, The Dow chemical Company and Caterpillar.

However, the Lane Clark Peacock report acknowledges that even some of these figures can be taken with a pinch of salt, as funds can legitimately use different sums when drawing up scheme accounts.

Three big areas of discrepancy are how long you expect your staff to live, the discount rates (a form of interest rate) and what you might expect to get from equity investment.

For example, United Utilities used a discount rate of 6% whereas Scottish and Southern Energy, which reports a £93m shortfall, uses 6.9%. However, using a 6% discount rate would increase its liabilities by around 20% or £350m, pushing it up to 12% of the company’s net worth.

There are varying views on future life expectancy, and hence how long these pensions will have to be paid. It is interesting to observe, however, that while most schemes use the middle view, life companies, such as Prudential, Legal & General, Friends Provident and Standard Life, the so-called experts in this field, use more conservative planning tools.

There are also marked disparities in the different views on life expectancy internationally. For example, AstraZeneca calculates its UK pensioners will live three years longer than those in Sweden and six years longer than those in Germany. Similarly, UBS assumes the British will outlive the Germans by three years and its US and Swiss pensioners by four years.

This website and sisters,,,, and, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.