Corporate pension funds could see already expensive pension arrangements hit their bottom line even harder next year due to poor economic conditions and new regulations coming into play.
(Jul 10, 2012) -- The largest 100 listed companies in the United Kingdom could see their aggregate pension contribution bill rise to over £26 billion this year, according to consultants and actuaries Lane, Clark & Peacock (LCP).
The increase in the level of necessary contribution will come from a combination of regulatory pressures and market conditions, LCP said. The government's auto-enrolment legislation - which will see all companies contributing at least 3% of an employee's salary to some form of retirement provision - should take effect this year on the very largest companies, trickling down to smaller ones by 2017.
Another higher cost would come in the form of deficit reduction, LCP said, something that has already begun to rise. Record amounts of over £2 billion have been paid in by large UK companies in an effort to plug deficits, the firm's annual 'Accounting for Pensions' report showed.
In 2011 these top 100 companies paid a total of £21.4 billion in pension contributions , however this did little to solve deficits, which moved around by up to £10 billion in one day due to volatile market conditions. LCP estimated that the combined UK IAS19 net deficit of FTSE 100 companies' pension schemes was £41 billion at May 31, 2012, compared to £19 billion at June 30, 2011.
Falling asset values and record low government bond yields, which are used to measure pension fund liabilities, have meant the funding gap has widened dramatically. Today the Pension Protection Fund - the lifeboat for bankrupt company funds - announced that less than 20% of UK corporate funds in the UK were in surplus at the end of last month.
This has meant trustees have applied pressure to sponsoring employers to make higher contributions, LCP said.
"Our analysis shows that investment returns (£23.2 billion) comfortably covered "interest" charges (£16.8 billion) and contributions paid (£13.5 billion) were well above the IAS19 value of benefits earned over the year (£4.8 billion). All other things being equal, the aggregate deficit would have been lower as a result. However, changes in IAS19 liability values (£15.1 billion), primarily as a result of lower discount rates due to lower corporate bond yields, offset those positive effects, leading to no overall change in deficit for these companies," LCP's report said.
Funding this retirement provision may have a knock-on effect to the sponsoring company at a higher level as pension funds become a larger part of the business. LCP found: "The average FTSE 100 pension liability was 49% of market capitalisation, compared with 40% in 2010. This increase was largely due to a reduction in corporate bond yields over 2011, which increased IAS19 liability values, combined with falls in equity markets which reduced the market capitalisation of many companies. As a result, pension schemes still pose a very significant risk for certain companies."
LCP gave the example of International Airline Group's accounting liabilities being over six times the value of its market capitalisation.
The firm also pointed out that during 2011 ten FTSE 100 companies paid more into their pension schemes than they distributed in dividends to shareholders.
For the full report, click here.