Defined Benefit  

UK private pension deficits fall £26bn

UK private pension deficits fall £26bn

The UK private defined benefit (DB) schemes have seen its deficits fall by £26bn since the beginning of the year, to £124bn at the end of January, according to data from JLT Employee Benefits.

At the end of December, the total shortfall of these schemes stood at £150bn, while at the end of January last year it reached £184bn.

The total deficit of FTSE 100 companies DB schemes has also fallen, by £6bn to £35bn, when compared to the previous month.

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The shortfall of FTSE 350 companies schemes also decreased, by £8bn, standing now at £44bn.

According to Charles Cowling, director at JLT Employee Benefits, “markets have seemingly been reasonably benign for pension schemes” in January, as deficits continue to drift downwards.

He said: “However, this masks frantic activity within a few companies with large pension schemes.

“For many companies the pension deficit calculated by the pension scheme trustees and used for calculating the cash funding required to be paid by the employer, is significantly greater than the pension deficit reported in the employer’s accounts.”

This is the case of Carillion, which has 13 final salary schemes in the UK with more than 28,500 members, and a deficit of £587m at the end of July, according to the company's results.

The contractor, which employs some 43,000 people, has been struggling for several months and issued a profit warning last year which sank its share price – which has fallen from more than £2 a year ago to about 14.2p just before it went into administration.

The trustees of the pension schemes were, at the time of the profit warning, working on the latest valuation, which would lead to a £990m deficit.

The DB schemes of Carillion are all either in the retirement fund of last resort, the Pension Protection Fund (PPF), or will soon enter it.

Mr Cowling said: “Actuarial valuations being carried out currently are likely to show a need for significant increases in cash funding.

“This comes at a time when the tension between funding pension deficits and paying dividends to shareholders has spilled over in recent weeks, with the positions at Carillion and Capita grabbing headlines and column inches.”

According to a letter from Robin Ellison, chairman of trustees of six of Carillion's pension schemes, to the Work and Pensions select committee, the company cited cash flow problems as reasons for not making higher contributions to its pension funds in 2011 and 2013.

However, the committee said that Carillion paid more than £70m in dividends both of those years.

Mr Cowling added: “The harsh lesson for shareholders may be that there are many companies with large pension schemes which are now going to come under increased pressure to prioritise the financing of pension deficits over returns to shareholders.

“This can only mean that we are likely to see more companies following the Capita example with share prices suffering as a result.”

The outsourcing firm's share price plummeted 40 per cent yesterday (31 January), after the company announced underlying profits for 2018 would be between £270m to £300m - short of the consensus forecast of £400m predicted by analysts.