Companies in the FTSE 100 are on track to clear their pension deficits by 2012, claims Lane Clark & Peacock.
In its latest Accounting for Pensions Survey, the actuarial consulting firm says although the total deficit of defined benefit (DB) pension schemes in the FTSE 100 is around £36bn, the same figure as last year, extra contributions by companies are making a difference.
The report reveals contributions have risen to record levels at £12.1bn for 2005, up 12% on the previous year, with the highest contributions paid by HSBC, at £1.3bn, while Royal Dutch Shell paid in £702m, and eight companies paid more into their pension schemes than to their shareholders.
But despite the lack of progress in reducing the aggregate deficit over the past year, LCP estimates the FTSE 100 companies are still on track to clear the aggregate deficit, calculated under the international accounting standard IAS19, by 2012.
This would mean FTSE 100 companies with DB schemes would be up to speed at the same time the government plans to introduce its pension reforms including compulsory employer contributions and employee auto-enrolment into personal accounts.
The report did also highlight some good news, with five companies in the FTSE 100 reporting a pension scheme accounting surplus in 2005, including financial services companies Old Mutual and Schroders.
Meanwhile the report appears to support the decision of a number of life companies to enter the bulk annuity market over recent months, as LCP estimates the total cost to the FTSE 100 companies to “buy-out” their pension schemes with an insurance company is £500bn.
As this amounts to a net shortfall in scheme assets of over £175bn, LCP says this represents an attractive market to the insurance companies and investment vehicles, such as Paternoster, Synesis Life and Aegon, which have started taking steps to enter the buy-out arena.
However the report claims other pressures on FTSE 100 DB pension schemes include the new framework set out by the Pensions Regulator to determine whether companies are funding their deficits at acceptable levels under the new scheme funding standard.
In order to avoid risking intervention by the Regulator, LCP estimates over 30 companies will need to boost their cash contributions by a total of £1.3bn each year for the next ten years, resulting in an average increase of over 50%.
While another potential issue for companies is the levies to the new Pension Protection Fund (PPF), however LCP estimates the pension schemes of FTSE 100 companies will only be required to pay about 10 to 15% of the £575m that the PPF originally estimated it will collect.
It says these findings indicate either the PPF will collect less than it estimated or the major financial burden of the levies will not fall on the top 100 companies.
But Charlie Finch, consultant at LCP, warns although the new legislation, such as the Pensions Act 2004, makes it more likely scheme members will receive their promised benefits, the price could be more scheme closures as companies are forced to commit cash to funding their deficits instead of paying benefits for current employees.
He says: “In a number of companies, directors face a difficult choice - how much cash to divert to pension schemes and where should it come from? In the short term, some may divert cash away from investment in the business to the pension scheme.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
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