Over £35bn has been paid by FTSE350 firms into their schemes over the last three years, but with very little effect on overall deficits, according to new research.
Pension consultants Barnett Waddingham said that the total IAS19 deficit reported by FTSE350 companies in 2012 was £64.9bn, which is only £4.1bn lower than in 2009.
The company said that the higher than anticipated deficit has largely been driven by the drop in corporate bond yields, which determine the IAS19 discount rate.
Barnett Waddingham said the report highlighted the impact that large deficits are having on shareholder returns with 23 companies having paid more towards their defined benefit (DB) scheme deficit than they did to shareholders in the form of dividends.
Nick Griggs, Barnett Waddingham head of corporate consulting, said: "As businesses plan for the future it is often the uncertainty around future contribution requirements to DB pension plans that is as much a problem as the absolute amount that is currently being paid.
"This is highlighted by the persistence of large IAS19 deficits despite significant contribution payments and the resistance employers will face from scheme trustees should they want to reduce contributions if cash flow worsens."
The research showed that for six companies, the DB scheme deficit exceeds 20% of the market capitalisation of the company after removing the pension scheme liability and risked becoming "the Pension Zombies" of the future.
According to the study, on average FTSE350 companies paid nearly £4,000 per employees to clear DB scheme deficit, which in comparison to 2011 is an increase of 15%. However, the cost of providing future pension provision for current employees, including defined contribution (DC) arrangements, remained at £2,600 per employee in 2012.
It was also revealed that for 32 companies, it would take over a year to repay the DB scheme deficit if all cash generated from day-to-day operations was used solely for this purpose.
Griggs said that that The Pensions Regulator's new statutory objective should help to reduce the impact pension scheme deficits have on employers.
But Griggs warned: "With so many areas of uncertainty, such as the future for Quantitative Easing and how it may be extended or unwound, the development of IAS19 deficits in the short term remains as unpredictable as ever."
He said that the governor of the Bank of England has suggested that he will provide some guidance on the future path of interest rates which will hopefully stabilise the IAS19 discount rate.
Griggs added that is should only take around a 1% rise in bond yields to eliminate the aggregate FTSE350 IAS19 deficit.
The effect of DB scheme deficits are being felt by employees in DC schemes as well, as DB deficits are consuming large amounts of company cash, which then in turn limits DC contribution levels and reduces returns on DC assets through reduced dividend payments.
Griggs said: "With the introduction of auto-enrolment, the Government has taken a small step towards closing the generational pensions saving divide that will materialise over the coming years.
"However, if employers are expected to provide the majority of the funding to close the gap, the cost of future pension contributions earned by employees will need to increase significantly. For businesses with a fixed pension budget this increase is reliant on deficit contributions reducing."
First published 30.07.2013
monique_simpson@wilmington.co.uk
