Contributions to the final salary pension funds of the top 100 companies increased last year by an average of 30%, according to research by consultants Watson Wyatt.
Three out of four FTSE100 companies reporting at the end of 2005 claimed to have paid more into their pension fund than in the previous year, maintaining the trend set in recent years, with a handful of companies making what, Watson Wyatt describes as, large special contributions.
The consulting firm says at the end of last year, pension deficits were broadly unchanged from the previous year due to reducing bond yields offsetting the impact of favourable equity markets.
However more recently, favourable investment markets have helped to knock nearly a third off the pension fund deficits of the UK's largest listed companies during March, as the combination of rising bond yields and rising equity prices reduced the pension deficits of FTSE 100 companies from £64bn at the beginning of the month to £44bn by the end.
The analysis of 42 FTSE 100 company accounts at the end of 2005, also revealed, apart form a small minority, most companies are now recognising the full deficits of pensions in their balance sheets, despite the option now available under the international reporting standard for pensions, IAS19, to smooth the volatility of actuarial losses and gains.
Results of the research also supported Watson Wyatt’s view that many pension funds are gradually switching money away from equities towards bonds, as the research found a 3% increase over the previous year in the proportion of money pension schemes invested in bonds.
Chinu Patel, senior consultant at Watson Wyatt, says: “Company and trustee boards across the country have been engaged in finding suitable solutions to address their pension deficits. Paying additional contributions was one option and, it seems, affordable since pre-tax profits for the group of FTSE100 companies reporting at the end of last year were 40% higher than the previous year."
He adds the number of companies choosing to recognise the full extent of their liabilities was also interesting, pointing out this is significant since Financial Reporting Standard 17 (FRS17) has been heavily criticised for putting company balance sheets in turmoil by forcing them to recognise all volatile items immediately in their own accounts.
Patel says: "It now looks as though UK PLC would rather accept that pension promises are part of their business commitments and the associated risks are better managed through corporate decision making than being hidden. It looks like FRS17 has been an effective educational exercise.”
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