Pension Capital Strategies have estimated that the collective deficit for FTSE100 listed companies with defined benefit schemes is now £73 billion, at the end of June.
Terrible as that sounds, that is a £17billion improvement on the position of the schemes at the same point last year.
Only five of the FTSE100 companies have a surplus. The situation has become so severe that ten FTSE companies have liabilities bigger than their market capitalisation. Some companies even have pension liabilities that are twice the size of their own market value. British Telecom, Invensys and British Airways are among such companies.
Final salary schemes are onerous for companies to provide for their employees, because the member’s employer guarantees a certain income for the retiree, for the rest of their life. If the scheme has not performed well enough, the employer has to make up the difference from its own resources.
PCS’ research revealed that 57 of the FTSE100 had to make such contributions in the last twelve months. The total amount that was contributed reached £11.8 billion.
From the pension trustees’ perspective, it must feel as though they are going two steps forward and one step back. For example, just as the cash contributions have been made, actuaries have claimed that the life expectancy of men and women has gone up, adding a few more months’ worth of payments to the liabilities that pension schemes have to meet.
No doubt some relief was felt when the government announced that payments can be indexed in line with CPI rather than RPI (which was traditionally higher). Indexing is necessary because otherwise inflation would wipe out the value of a final salary scheme without it.
However, the announcement must have sent pension trustees to their lawyers to get the small print of their schemes checked – some schemes may have RPI written into their DNA as the index that must be used.
