Pensions black hole doubles

Aug 06 2003 by Brian Amble Print This Article

The black hole in the pension schemes of Britain's top 100 companies has doubled over the past year to £55bn.

The annual survey of pensions by the actuaries Lane Clark & Peacock shows the pension deficits shown on company accounts now add up to more than £55bn, equating to 6 per cent of the total market capitalisation of the FTSE 100.

Contributions paid out by company pension schemes in the last year were worth £4.2bn while employer contributions totalled only £3.6bn – a shortfall of £600 million.

The value of the FTSE 100 Index would have to increase by four percent and reach 6000 points by next year in order to clear the deficit.

Lane Clark says that the finances of seven major companies could be under threat because of financial problems in their pension schemes. All have a large pension scheme relative to their size, with most of their investment in equities.

ICI and BAE Systems have pension schemes worth two or three times as much as the company, while the £2bn deficit in Rolls Royce’s pension fund is more than the company is worth on the stock market.

British Airways, BT Group, Invensys and Royal & SunAlliance are also exposed to the volatile movement in equities.

Among the companies covered by the report, BP showed the largest deterioration in the difference between its schemes’ assets and its liabilities. Over the year, the BP pension schemes moved from an surplus of £1.5bn to a deficit of £3.4bn. BP has recently announced its intention to make substantial contributions to clear their pension deficits.

Martin Slack, senior partner at Lane Clark & Peackock, said: "Some of the companies are starting to look like giant investment trusts which just happens to make a few engines on the side - or own aircraft or whatever the business is."

Bob Scott, partner at LCP, added: "Companies have suffered a double whammy. Equity falls have eroded the market values of scheme assets, whilst an increase in the value of corporate bonds – against which the FRS17 value of scheme benefits is measured – has resulted in a rise in scheme liabilities."

Lane Clark & Peacock also claimed out that some finance directors were taking an "optimistic view" of what their pension schemes could expect to make from their investments.

Of 66 finance directors agreeing to answer the question, 32 increased their expected future rate of return on share investments.

If finance directors assume pension schemes will make more money from their investments, they need not contribute as much in the present, a strategy that threatens to make an already bad situation even worse.