FTSE 100 pensions post record deficit

The deficit is the largest recorded shortfall recorded under the IAS19 accounting standard currently used for pension plans, and illustrates the devastating impact that the financial crisis has had on pension plan finances.

According to the report, fallout from the collapse of Lehman Brothers hit pension plan assets particularly hard—with estimates of losses of £42 billion from the beginning to the end of 2008. Surprisingly, some FTSE 100 plans—such as Standard Life and Rolls-Royce Group—bucked the trend and disclosed gains on pension assets from the beginning to the end of 2008 of 14% and 8%, respectively.

LCP estimates that had new International Accounting Standards Board proposals to include pension-related losses and gains on company income statements been in force for 2008, aggregate reported profits for the FTSE 100 companies reporting in December 2008 would have been slashed by 70% (from £46 billion to £13 billion), due almost entirely to falling equity markets.

The report suggests that some organizations are not paying enough attention to their pension plans, pointing out that while 46 FTSE 100 companies identify pensions as a key risk to their business, only 17 set out a policy in their report and account for dealing with pension risk. This contrasts starkly to the comprehensive approach taken by all FTSE 100 companies to their other financial risks (such as changing fuel prices or foreign currency exchange rates) where there is full disclosure on risk management.

Not surprisingly, defined benefit plans are becoming fewer in number, as only three FTSE 100 companies (Cadbury, Diageo and Tesco) now disclose that they offer defined benefits to new employees. Others have announced measures to reduce or freeze benefits completely for existing members.

Longevity is also an issue, as companies have again upped their assumptions of how long pension scheme members will live and added another £8 billion to balance sheet liabilities. This year saw the first longevity hedge deal by a U.K. pension plan, as Babcock International transferred longevity risk for pensioners to the capital markets. LCP expects a number of deals of this type from FTSE 100 companies in the coming months.

“The collapse of Lehman Brothers in September 2008 had a significant impact on the U.K. pension schemes of FTSE 100 companies,” says Bob Scott, a partner with LCP. “Asset values fell sharply yet, paradoxically, the effect did not show up immediately in company accounts as corporate bond yields rose and inflation expectations fell. However, since March this year, deficits have ballooned as aggressive cuts in interest rates and quantitative easing have caused these factors to reverse.”

“Looking ahead, the outlook for the economy and financial markets remains unclear, creating further uncertainty for pension scheme finances,” he adds. “Those companies which work with their pension scheme trustees to identify and reduce pensions risk will be better placed to weather any future financial storms than those which fail to act.”

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