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Pension deficits threaten 1 in 10 FTSE firms

“The biggest deficit contribution was made by oil group Royal Dutch Shell, which handed £2.7bn to its pension scheme.” home

• Only five FTSE 100 pension schemes are in surplus

• Nine firms have pension liabilities higher than market value

Julia Finch: Wednesday 19 May 2010 18.55 BST

Almost one in ten blue-chip FTSE-100 companies face pension scheme deficits so vast they threaten the future of the business, a survey has discovered.

The report says that only five FTSE-100 pension funds are in surplus, and predicts that final salary pension schemes at top companies could end within three years.

The survey by Pension Capital Strategies in association with investment bank group JP Morgan Cazenove says nine of Britain’s biggest listed companies face pension liabilities greater than their stock market value – a situation which PCS says “represents a material risk to the business”.

The nine companies include Invensys, BAe Systems, Royal Bank of Scotland and insurance group RSA, but the two businesses with the biggest pension problem are British Airways and BT – where total disclosed pension liabilities are more than three times their equity market value.

The PCS report calculates that the total deficit of FTSE-100 companies stands at £66bn – unchanged from a year ago – despite “a very significant increase in the funding of pension deficits”. Companies have poured £11bn into deficit funding over the past year, up from £4.4bn a year earlier. The biggest deficit contribution was made by oil group Royal Dutch Shell, which handed £2.7bn to its pension scheme.

The survey also reveals that pension funds missed out on the benefit of soaring equity markets in the year to the end of March, because they have continued to switch their investments into bonds. Three years ago the average pension scheme allocated 34% to bonds, but this has now risen to 50%.

PCS says that with cash in short supply it expects pension trustees to be increasingly open to approaches to deficit funding. Instead of cash, they could be persuaded to take other assets. Sainsbury’s and Marks & Spencer, for instance, have recently announced property partnership deals with their schemes worth a total of more than £1bn towards reducing their deficits.

The total disclosed pension liabilities of FTSE-100 firms has soared – from £382bn to £410bn in the past 12 months – according to the survey, and 14 companies now have liabilities of more than £10bn. The largest of those is at Royal Dutch Shell, which has liabilities of more than £39bn. Six businesses – Barclays, BAe, BP, Lloyds Banking Group, Royal Bank of Scotland and BT – have liabilities of more than £25bn.

While deficit funding is up, there has been a marked decline in the provision of defined benefit pensions to staff. The costs linked to continuing provision fell 15% last year – “one of the clearest signs yet that we are coming to the end of the road for final salary schemes”, said Charles Cowling, managing director of PCS. He predicted that final salary schemes could be extinct in big companies by 2013: “If reductions continue at this rate, final salary schemes will have six years left of life; if the trend accelerates, which is likely given recent announcements of pension scheme closures, then the lifespan of the final salary scheme may be as little as two to three years.”

The costs of running final salary schemes have risen dramatically in recent years as a result of tax changes, low interest rates, poor investment returns and increasing life expectancy.

Health and beauty group Alliance Boots is closing down its final salary scheme for existing staff, while last year Barclays bank told 18,000 staff they were to shut their defined benefit scheme and replace it with a cheaper defined contribution retirement plan. BP shut its £11bn scheme to new recruits from last month.

The five companies with the best funded schemes, and which still have surpluses, are Old Mutual, Prudential, Investec, Land Securities and the London Stock Exchange


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