Pension contributions rise but the hole remains the same

2004

Growing concern about the shortfall in company pension schemes prompted firms to pay almost twice as much into their pension schemes in the last year than they did in the previous 12 months, according to new research.

Consultants Watson Wyatt looked at the contributions made to the defined benefit pension schemes of FTSE 100 companies reporting at the end of 2003 and found that on average contributions from employers had risen by 95 per cent.

Some 75 per cent of these FTSE 100 companies had increased pension contributions, in some cases quite substantially.

In 2002 contributions paid in aggregate to FTSE 100 pension schemes barely covered the ongoing cost of new accruals. But in 2003 total contributions by employers covered not only ongoing accruals but an almost similar amount again towards improving pensions security.

"Concerns about growing deficits and the increased profile of pensions in corporate affairs generally have had an impact on companies' pension funding decisions," said Watson Wyatt’s Chinu Patel.

"This came at a time of improved pre-tax profits for many companies, up 30 per cent on average over their 2002 levels, so companies could afford to, and have, paid in more."

A quarter of the aggregate increase in pre-tax profits of FTSE 100 companies in 2003 over 2002 was absorbed by increased pension contributions, although the distribution across all companies was far from even.

The research also found that the proportion of assets invested in equities has hardly changed over the last year, with about 60 per cent remaining invested in equities. But this may mask an underlying reduction in the proportion allocated to equities coupled with the relatively stronger performance of equities over the year.

According to Watson Wyatt, many pension schemes are looking to reducing their exposure to equities over the long-term, but have been held back from doing so due to current market conditions. A few pension schemes have used derivatives to reduce exposure to equities in the interim while waiting for the right investment conditions to make tactical changes.

The research, which covered the pension schemes of 40 of the 50 FTSE 100 companies that reported on 31 December 2003 (the other 10 annual reports were still to be published when Watson Wyatt undertook its analysis), found that despite the extra contributions and the improvement in equity markets FRS17 pension scheme deficits have hardly changed at an estimated £60bn for the FTSE 100.

But the report also estimates that the aggregate deficit in FTSE 100 pension schemes at the end of March 2004 was also unchanged at around £60 billion.

"Even if companies continue to contribute at the new increased levels it will take many years before the deficits are eliminated unless there is a dramatic improvement in the stock markets without a knock-on effect on the corporate bond market or on inflation expectations," said Chinu Patel.

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