The financial crisis has plunged the pension schemes of FTSE 100 companies into a record deficit, forcing cuts in benefits for rank-and-file employees, says an annual survey.
The report from Lane Clark & Peacock, the actuaries, reveals that the schemes were running a £96bn ($162bn) deficit in mid-July, more than double the shortfall measured in July 2008.
Separately, companies have increased their assumptions of how long scheme members will live, adding £8bn to their balance sheet liabilities.
Royal Dutch Shell, with a pension shortfall of £5.6bn at the time the report was compiled, had the largest deficit in the survey. BAE Systems, the defence manufacturer, was second on the list with a £4.2bn deficit, followed by BP at £3.9bn and Unilever at £2.6bn.
Pensions experts have long warned of the risks of investing in asset classes with higher potential returns – but also higher risks – that do not rise and fall in line with pension liabilities.
Bob Scott, a partner at Lane Clark & Peacock, said that while the collapse of Lehman Brothers, the Wall Street investment bank, last autumn had a “significant impact” on FTSE 100 pension schemes, the full impact of declining asset values was not reflected immediately in company accounts.
Deficits had “ballooned” only since March, Mr Scott said, because of aggressive cuts in interest rates that had reduced the discount rates that schemes used in calculating the future value of their assets.
Growing deficits and pressure on profits are driving more companies to cut back on their defined benefit schemes. Only three FTSE 100 companies – Cadbury, Diageo and Tesco – have disclosed in their reports that they offer defined benefits to new employees. Others are reducing or freezing benefits for existing members.
“The prognosis for defined benefit schemes is not good; companies are closing them regularly,” Mr Scott said. “Unless there is political will to change …regulatory and tax measures, we will see few such schemes in the private sector in the future.”
According to the survey, companies are still not paying enough attention to managing risk. The report found that 46 per cent of companies identified pensions as a key risk to their business but only 17 set out a policy to tackle it.
Those that took early action to reduce pension risks, such as Standard Life and Rolls-Royce, bucked the trend, disclosing 14 per cent and 8 per cent gains respectively on pension assets over the past 12 months.
“Companies that work with trustees to identify and reduce pension risk will be better placed to weather any future financial storms than those that fail to act,” said Mr Scott.
This year also saw the first deal by a UK company to hedge itself against the risk that its retirees will live much longer than expected.
Babcock International transferred its so-called “longevity risk” to the market in a move likely to be imitated by other pension schemes.
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