Pension scheme deficits as a proportion of UK plc profits have risen so much in the last five year they are now even higher than in the immediate aftermath of the financial crisis, according to the latest figures.
The aggregate pension deficit of the UK’s top 350 companies grew by £12bn in 2016 to reach £62bn, a report from actuarial consultant Barnett Waddingham has found.
This is equivalent to 70 per cent of pre-tax profits - which totaled £88.9bn for the year.
In 2011, the pension deficit was £54.5bn – just 25 per cent of the £214bn pre-tax profits of the top 350 firms that year.
In 2009, in the aftershock of the financial crisis, the deficit as a proportion of profits was still considerably lower than it is now, at 60 per cent, the research showed.
Even if profits were to remain steady for the next three years, it would only take a 0.7 per cent fall in bond yields for the deficit to actually exceed annual UK plc profits by 2019.
The deficit has come under increasing pressure in recent years, with rising life expectancy and lower expectations for future investment returns putting more pressure on pension schemes and pushing the deficit upwards, Barnett Waddingham pointed out.
Quantitative easing policies, with central banks purchasing securities to increase the money supply, are also playing a part in the deficit rise, said Tom Selby, senior analyst at AJ Bell.
He said: “Defined benefit pension scheme liabilities have clearly suffered collateral damage as a result of the government’s QE programme.
“However, it is worth remembering that many of the assets these schemes invest in will also have benefited from the money printing policy.”
Furthermore, “the consequences of allowing the banks to crash could have been far more severe than the pain felt by DB schemes today”, he added.
Another report on pension deficits, from JLT Employee Benefits, analysed the total cost of pension liabilities at FTSE 100 listed companies, which grew £95bn in 2016, from £586bn to £681bn.
This increase has happened despite firms barring new employees from their defined benefit schemes and increasing funding by more than £4bn, the research showed.
Nevertheless, the closing of DB schemes is having little to no impact on reducing liabilities.
After allowing for the impact of changes in assumptions and market conditions, JLT estimates that ongoing DB pension provision fell approximately 12 per cent in 2016.
Charles Cowling, director at JLT, said that “times and markets are still very difficult for many companies”.
“We expect that defined benefit pension schemes will have all but disappeared from the private sector within the next year or so,” he said.
Nick Griggs, partner at Barnett Waddingham, is more optimistic.
“If equity returns continue at the levels seen in the last few years, long-term interest rates rise more than expected and longevity increases do not provide any nasty surprises, the pension deficit problem could solve itself,” he said.
The problem with rising deficits is affecting a great majority of UK pension schemes.
Frank Field, who chairs parliament’s Work and Pensions Committee, has questioned why the Universities Superannuation Scheme (USS) deficit more than doubled in three years.
The annual accounts of the USS showed the pension fund’s deficit had widened from £5.3bn in 2014, to £12.6bn this year. This is the largest recorded deficit of any UK retirement fund.
The BBC, which is facing a current £1.8bn deficit of its DB scheme, will be paying £2.37bn over the next 11 years in a new repayment plan.
maria.espadinha@ft.com
