Pension Deficits Soar in the UK, Consultant Finds

(November 30, 2011) — A report by consulting firm Lane Clark & Peacock (LCP) finds that accounting changes and Solvency II are tremendous threats to pension plans in 2012. 

Despite record levels of contributions, the analysis notes that combined scheme deficits of FTSE100 global firms have grown by 70% in 12 months to €290 billion (£248 billion).

“The year ahead looks like it may well bring one burden too many for European pension schemes. Pressure to deal with new pensions accounting under IAS19, volatile markets and regulatory uncertainty are likely to lead to further pressure for organizations to reform pension plans in every one of the many countries where our clients operate,” notes Alex Waite, partner and head of LCP Corporate Consulting. “Going into 2011 the world’s largest 100 companies disclosed pension deficits of €170 billion. To put that in perspective, it’s equivalent to the cost of the Greek bailout. And as 2011 has proved, just because it’s bad at the start of the year, doesn’t mean it can’t get worse. In last year’s European Pensions Briefing we estimated that a one-in-ten-chance outturn could increase deficits by €100 billion or more. In fact, over the year so far, the combined deficit has increased by over €120 billion.”

According to the report, new pension accounting rules could prove to be additional risks for multinationals with new disclosure information required for many companies under IAS19.

Phil Cuddeford, Partner at LCP and co-author of the report, says in a statement: “Analysts, lenders and shareholders will take a long hard look at companies’ 2011 annual report and accounts in the light of the new accounting changes. Those that have taken steps to manage pension risks will send a clear and confident message to the markets.  Those that haven’t may well find that they are judged harshly by markets and lenders increasingly concerned about pension risks.”

Regarding Solvency II — a new set of capital requirements — the Confederation of British Industry (CBI) recently cautioned that British businesses will be negatively impacted if schemes are forced into Solvency II capital requirements. “We need the UK government to step up to the plate in Brussels and stop the imposition of insurance-style solvency standards on DB pension liabilities. The government can do a lot more than it has to date,” CBI chief policy director Katja Hall said in a statement.  

Hall continued: “This issue affects all businesses with DB liabilities, whether or not they have closed the scheme. The proposal is a terrible idea, based on a wrong-headed insistence that defined benefit schemes are the same as insurance contracts. The potential effects are very significant, and would massively undermine the government’s economic goals.”