UK companies most worried about pension deficits

Dec 13 2006 by Brian Amble Print This Article

While companies across the globe are concerned that their pension plans pose a financial risk, a new report has found that organisations in the UK are the most worried about the possible impact of their pension deficits.

With occupational pensions coming under increasing pressure throughout the industrialised world, a new survey has found that more than half of companies believe their pension plan represents at least a moderate financial risk to their organisation with as many as one in six believing it poses a significant risk.

Some 56 per cent of the 300 companies across the globe surveyed by Mercer Human Resource Consulting saw their pension plan as posing a moderate risk, with 16 per cent worried that it poses a 'great' risk.

Companies in the UK expressed the greatest level of concern, with one in three (29 per cent) seriously worried about their pension plan. In Continental Europe, the figure was almost a quarter (24 per cent).

In contrast, less than one in 10 (9 per cent) of US companies consider themselves to be at great risk.

Of the other countries covered by the survey, including Canada, Australia and New Zealand, on average 16 per cent think their pension plan poses a great risk.

"Over the past few years, the grip of pension plan legislation has tightened around UK companies and now some are really feeling the squeeze," said Tim Keogh, Mercer worldwide partner in the UK.

"With the introduction of Pension Protection Fund levies and more stringent plan funding rules, it's not surprising more UK firms consider themselves to be at substantial risk."

As the report also points out, the concerns of UK companies are unsurprising given the fact that that their average pension exposure is almost twice that of U.S. organisations. Gross pension liabilities for FTSE100 companies is 28 per cent of market capitalisation, compared to an equivalent figure of just 15 per cent for S&P500 companies.

"Letting a plan deficit develop can create a serious dent in profits and affect business growth, so employers can't afford to disregard the risks," said Bob Moreen, worldwide partner at Mercer in the U.S.

As a result, six out of 10 of the organisations surveyed have already made or are planning to make changes to their benefit provision in the next two years, with the highest proportion of these (almost eight out of 10) in Continental Europe.

Six out of 10 companies based in Continental Europe have closed their defined benefit (DB) plan to new employees in the last two years, or will soon do so, compared to half in the UK and four out of 10 in the US.

Additionally, Continental European companies are more likely to freeze their DB plans for all members (24 per cent compared to 22 per cent in the US and 14 per cent in the UK).

"It's interesting that companies based in Continental Europe are currently the most active in cutting back members' benefits, given the region's reputation for strict labour laws and heavyweight unions," said Tim Keogh.

"Though this may be because US and UK companies were earlier into the game, the results prove that companies globally are responding to the same risk containment issues."

To this end, the survey suggests that companies are beginning to make investment decisions that take explicit account of their pension liability profile, with a quarter intending to increase interest rate hedging via fixed income and/or derivatives in the next two years and a similar proportion investing in alternative assets to enhance returns and diversify portfolios.

But while most companies are working hard to reduce their risk exposure, their efforts may also be going unnoticed.

Only around 40 per cent of respondents believe investment analysts are accurate when assessing the impact of their pension plan on the value of their company. A fifth said analysts either overstate or understate the effect while the remaining four out of 10 respondents do not know how analysts are assessing the financial impact of their pension plans.

"Regardless of whether or not companies feel their pension plans are material to their overall financial results, it is important they ensure their view is shared by their analysts," Bob Moreen said.

"We expect more companies will be working on this, as analysts pay increasing attention to pension and other retirement benefits in assessing company prospects."