Company pension schemes lurch into the red

A leading actuary says the credit crunch has wiped £50bn off the value of FTSE 100 pension pots...

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Last Updated: 31 Aug 2010

The pension schemes of Britain’s biggest listed companies are now a combined £41bn in deficit, according to a new report by actuary Lane Clark & Peacock. This time last year, they actually had a surplus of £12bn – but the triple whammy of the credit crunch, rising inflation, and the subsequent fall in the world’s stock markets have destroyed more than £50bn in value. That’s the biggest swing in a single year since the new accounting standards were introduced in 2002 – and could leave an awful lot of people worried about where their future pension cheques are going to come from…

In fact, LCP says the situation could have been a lot worse. The new standards require companies to value their liabilities via bond yields, which are currently at record levels – this has wiped £40bn off the bill, apparently. What’s more, the sensible firms have used the recent surplus to reduce their risks by pumping in extra cash to their schemes (nearly £40bn over the last three years), offloading their liabilities altogether to a buy-out specialist, hedging their exposure via clever financial instruments or by selling lots of their shares.

‘Events of the last year demonstrate the importance of assessing and managing pension risks and being prepared to take opportunities when they present themselves,’ says LCP partner Bob Scott. But thanks to the credit crunch, the window of opportunity now appears to have slammed shut – and Scott isn’t expecting things to improve this year: ‘With a possible recession looming and the threat of further regulatory intervention, the outlook for continuing defined benefit provision seems rather bleak,’ he warned today.

One major problem for these firms is that we’re just not dying quick enough once we hang up our work boots. In the last couple of years, total liabilities have jumped by about £9bn every year because of increased life expectancy expectations – meaning that these companies have to pay out pensions for longer (60-year-old male pensioners are now expected to live to somewhere between 82 and 89, apparently).

On the plus side, smaller firms appear to be managing their liabilities better – according to the latest figures from the Pension Protection Fund, the 8,000 final-salary schemes they monitor are collectively £8bn in the red, while almost 30% are actually in surplus.

But with deficits like these, it’s likely that firms large and small will keep on closing their schemes to new members. For private sector workers, final-salary schemes will surely be consigned to history before too long...


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Company pension schemes lurch into the red
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