Pension plans of FTSE 100 companies had a net surplus as of mid-July—the first time in five years—but that surplus may not last for long, according to Lane Clark & Peacock(LCP).
The actuary and consulting firm’s 14th annual report, Accounting for Pensions, finds that the surplus may not survive once companies reflect the latest mortality projections in their accounts.
Despite allowing for longer life expectancy(companies who disclosed their assumption in their 2005 and 2006 accounts allowed for an additional 1.5 years on average in 2006), LCP believes that companies may still not be accounting fully for how long people will live in the future.
Each additional year of life expectancy adds about $25.6 billion to pension liabilities.
“Also, companies whose pension schemes remain heavily invested in equities run material investment risk and the fragility of the surplus was highlighted by recent stock market falls,” says Bob Scott, a partner with LCP. “U.K. pension schemes are not out of the woods yet.”
At mid-July, the pension plan surplus of FTSE 100 companies was nearly $26 billion, but that changed shortly after the report was written.
The surplus turned into a $13 billion deficit by the end of month, showing how delicate the current surplus is and how vulnerable plans are to the performance of equities. Fifty-seven percent of total assets in FTSE 100 pension plans are invested in stocks.
Many plans are making moves to manage down risk. For example, HSBC has recently moved significantly into bonds, while Diageo and Alliance & Leicester have taken out swap contracts to hedge part of their liabilities against movements in interest rates and inflation, and Tesco has diversified into alternative asset classes.
“Companies are beginning to breathe the first sighs of relief after a period of sustained deficit headaches,” Scott adds. “But having a surplus brings its own issues and companies need to decide what steps to take to protect their fragile surpluses.”
To comment on this story, email craig.sebastiano@rci.rogers.com.