survey based on accounting calculations shows large pension scheme deficits, however regulator believes such figures are exaggerated
Apparent billion-pound UK occupation pension scheme deficits based on accounting standard FRS 17 calculations should not panic members into immediate transfers out, according to Opra.
The occupational pension regulator said that while every scheme is specific and should be treated as so, the majority of members would likely be better off staying part of existing final salary schemes, providing the employer is certain to stay liquid and continues offering the plan on similar terms.
That said, FRS 17 calculations by Credit Suisse First Boston (CSFB) show listed UK companies running final salary schemes are facing a £92bn deficit in their pension liabilities. Based on the accounting standard, CSFB estimates that less than a year ago, pension funds were more or less in surplus on aggregate. At one point back in 2000 they showed a surplus of around £80bn.
Worsening equity markets have driven the value of final salary pension funds downwards, leading to a position, based on data taken on 11 February, where the average FTSE 100 company has pension liability deficits totalling around 10% of their market capitalisation and around 95% of annual operating profit.
The situation is even more serious among small and mid-cap companies, with an average pension deficit of 15.5% of market cap and 132% of operating profits.
Among the more than 240 companies researched by CSFB, eight currently have pension scheme liabilities greater than their market capitalisation, including British Airways, Rolls-Royce, Royal & Sun Alliance and BAE Systems.
Worst off, according to the figures, is technology company Morgan Crucible, with an 84% weighting in its pension fund, where the liabilities deficit is 196% of the company's market cap.
However, the volatility of FRS 17 as an indicator of pension strength and of the markets at present can be seen by the fact that in calculations based on assets and liabilities at 2002 company year ends, the deficit as a percentage of market cap among FTSE 100 companies at that time was just 1%. By 11 February 2003 this had jumped to 10%.
Overall, the group believes FTSE 100 and small/mid-cap companies are currently well over 20% underfunded, based on FRS 17. Of the 50% of UK listed companies with exposure to defined benefit pension schemes, currently just 4% are in surplus.
CSFB's analysis is based on FRS 17 disclosures reported in company accounts, with the group estimating the current funding status through adjusting assets and liabilities by movements in asset benchmarks.
Commenting on its findings, Credit Suisse First Boston said the final salary liabilities situation looks bleak at present, with very few companies likely to be able to take contribution holidays and many forced to make special additional payments.
However, it added there are both larger and smaller pension scheme liability estimates already in the public domain and the figures quoted in the media are not as sensational as they are being made to appear.
'Estimates are hugely sensitive to changes in equity and bond markets and the deficits have no immediate implications for corporate cashflow as FRS 17 is only an accounting standard,' the group said.
With the FRS 17 deficits primarily down to market conditions, there are further concerns that, as the equity portion of struggling pension funds will be heavily invested in companies suffering similar pension difficulties, this could lead to the start of the sort of magic circle affect that devastated split caps last year.
Many believe regulators would not let things go that far however, because if long-term downward pressure of share prices did lead to the widespread closure of final salary schemes, there would be a renewed pension burden on the Government.
Gary King, pensions manager at Save & Invest, feels the split capital comparison is somewhat inappropriate as the FRS 17 deficits are due to current uncertainty in the market, which is likely to lessen when the Iraq situation is resolved, rather than inherent structural issues within the market and companies themselves.
He added that, in light of the poor market conditions at present, any company without FRS 17 deficits is likely to be massively overfunded when the market picks up. A better analogy to use is that of life office solvency requirements, according to head of communications at Scottish Life, Alasdair Buchanan.
The FSA recently relaxed these requirements when forced selling by life companies to meet them was putting pressure on the market, and Buchanan feels the Government would do something similar with FRS 17 if it exerts serious downwards pressure on the market.
He said: 'One of the problems with FRS 17 is that it is only a snapshot valuation of a pension fund and has no flexibility to reflect market movements.
'There is currently an ongoing debate about the usefulness of FRS17 and it remains to be seen whether such a volatile indicator of pension strength is valid in the long-term.'
In the UK, although companies do not need to be fully compliant with the FRS 17 accounting standard until 2005, most are already reporting its effects in the accounts.
In Europe and the US, pension accounting standards allow actuarial gains and losses to be amortised, which spreads the impact of differences between expected and actual outcomes.
The UK standard does not enable this to happen, opting instead for actuarial gains or losses to be recognised immediately in the balance sheets, which has the effect of enhancing or reducing earnings in times of sharp market movements.
Head of UK intermediary distribution
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