UK plc pension deficits rise sharply on weak markets
Weak stock markets and record low bond yields pushed up FTSE100 pension deficits
By CFOWorld staff | CFO UK | Published 15:40, 10 July 12
Pension deficits at UK plc rose over the past year, according to new research that showed the combined deficit of FTSE 100 companies more than doubled to £41 billion.
Weak stock markets and record low bond yields pushed up company pension deficits, research by actuarial firm Lane, Clark & Peacock showed in a report.
The rise in deficits comes in spite of companies having poured £11 billion into schemes over the last year in an attempt to plug the deficit, LCP said.
Total liabilities of blue chip companies stand at £447 billion against total assets of £406 billion pounds, LCP's analysis of 83 of the FTSE 100 companies showed.
The demands on company pension pots have been increasing because people are living longer, meaning schemes are obliged to pay out to workers for longer after they retire.
At the same time, the returns the pension funds make on investments are shrinking because of volatile financial markets and historically low bond yields, used to assess liabilities, which are calculated using benchmark yields such as those on top-rated corporate bonds.
Low yields lead to bigger liabilities, hence more deficits, because pension funds will need more assets to pay sufficient income to pensioners in the future and companies may need to pay more into the pot.
"Deficits have fluctuated by as much as £10 billion in a single day as uncertainty continues to characterise both equity and debt markets," said Bob Scott, partner at LCP and author of the firm's report.
Uncertainty over returns has also prompted a shift out of riskier assets such as equities to those seen as safe havens, such as government bonds, which has resulted in more downward pressure on yields.
Only 35 percent of UK pension scheme assets were being held in equities at the end of 2011, compared with 43 percent in 2011 and nearly 70 percent 10 years ago, the report said.
These pressures not only impact the ability of a company to invest in the economy and attract capital, but can also push shareholders to the back of the queue in terms of how a firm's cash is shared out.
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