The aggregate pension deficit for the UK’s biggest companies by market capitalisation dropped by a dramatic 63% over the last year due to shifting indexation measures to CPI and higher employer contributions to pension schemes.
The combined deficit for the 100 biggest companies in the UK, the FTSE 100 listed companies, tumbled to £19 billion from £51 billion a year earlier, said the Accounting for Pensions report, published by the actuarial consultancy Lane, Clark and Peacock yesterday.
However, there’s no scope for complacency as the combined pension liabilities for the companies stood at £400 billion, equivalent to £4 billion for each company, and that is a lot of risk to be managed, warned LCP LLC senior partner Bob Scott.
“The buy-in and buyout market has been active and prices are keen but they wrote £8bn of business last year, so it’s going to take a lot of time to get these liabilities settled,” he said.
The idea of shifting some of the risks to the insurance industry offers limited scope, he added. A small percentage, only liabilities worth £8 billion were transferred to insurers last year, he added. More companies are cutting market and longevity risks, the research found.
The shift from Retail Price Index (RPI) to Consumer Price Index (CPI), though generally meant for deferred members, was cited as the main reason for the drop in deficit. The switch, still to be implemented by many schemes and not open to all, benefits the schemes’ sponsors, at the cost of reduced pensions for members.
“We’re seeing a ‘small print lottery’ under which a 45-year-old deferred pensioner in one scheme is unaffected yet a similar member in another scheme could stand to lose roughly a quarter of the value of their pension,” explained Mr. Scott.
The report pointed out that £17 billion were paid by the top companies to schemes; however, £11 billion went towards reducing benefits rather than providing additional benefits to employees.