‘Deepening pensions deficit leaves UK companies staring into an abyss’
04 Sunday Nov 2012
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An article in the Telegraph last month highlights how bad the UK pension situation really is. . .
JLT Pension Capital Strategies has released figures which show the total deficit of FTSE 100 defined benefit pension schemes has increased by two thirds in the past year.
The consultancy said the total deficit stood at £55bn on June 30 compared to £33bn a year earlier.
Eleven FTSE 100 companies have pension liabilities that are greater than their equity market value; BAE Systems, BT and RBS are committed to paying out pensions that are worth more than double their market value.
The deepening deficit hole has been caused by factors including poor returns on equities and the Bank of England’s quantitative easing programme, which pushes up the price of government gilts, creating lower returns for pension funds.
The deficit figure is down from £73bn in March, largely thanks to a slight rally in the corporate bond markets through which pension liabilities are measured, but the FTSE 100 have been in a “big deficit zone for quite a long time,” said Charles Cowling, managing director of JLT Pension Capital Strategies.
“We have reached the stage where scheme deficits are widening substantially on an annual basis,” he said.
Blue-chip companies are trying to plug the gap with capital injections while looking for alternative sources, such as property investment, to fund their pension schemes.
If the FTSE 100 companies are staring into an abyss, smaller companies are going bust on a regular basis because they can no longer finance their pension schemes.
“Mortality rates are improving at a rate of five hours a day,” said Mr Cowling said. “That’s great news to us as a nation, but if you’re the person that’s got to pay out the pension, that represents a lot more you’ll have to pay.”
Companies have generally shifted towards defined contribution pension schemes, where a company makes contributions or matching contributions to a pension but doesn’t guarantee future payments to the employee, as they can’t afford defined benefit schemes where the employee has a fixed amount guaranteed on retirement.
“We have to face up to the fact that DB’s gone and DC’s coming,” said Mr Cowling.
The auto-enrolment scheme, which kicked off on October 1, is a defined contribution plan which will see millions of workers gradually included in an automatic pension scheme, although a report from JLT launched at the Liberal Democrats’ party conference in Brighton said minimum compliance with the scheme would not secure a comfortable retirement.
The consultancy estimated that an employee paying the 8pc default contribution would have to work eight years beyond the current retirement age – to 76 – to achieve the recommended pension of two thirds of final earnings.
The government has said the contribution rates were set to ease people into saving and individuals should aim to save more if they can.
JLT recommended making pensions contributions compulsory and increasing contributions from 2022. It also suggested raising the state pension age to 70, to begin with.
“A lot of the solutions for pensions aren’t very popular,” Mr Cowling admitted.
He argued: “Perceptions have to change. We have to face up to how expensive [pensions] are. People need to start planning earlier and have a realistic expectation of when they can afford to retire.”
He said: “We are like a ship adrift at sea. We could hit the rocks, we could come through fine, but you shouldn’t just cast yourself off and hope. You need to take action.”