Aon Hewitt has said that the liabilities of the FTSE 350's final salary pension schemes, as shown in their company accounts, are now equal to 35% of their sponsoring companies' combined market capitalisation. This, Aon Hewitt says, is "the highest level this proportion has ever reached".
With low gilt yields, rising liabilities and the equity markets remaining at low levels, the proportion has increased significantly over recent months.
At 30 June 2012 the FTSE 350 pensions accounting deficit stood at £77bn, an increase of 40% since the start of the accounting year and up from £20bn at the same time last year. The FTSE 350 aggregate pensions accounting liability was £570bn at 30 June 2012 (up from £473bn at 31 March 2011), while the market capitalisation of the FTSE 350 on the same date was £1,623bn (down from £1,768bn at 31 March 2011).
"When we look at the figures, it's evident why final salary pension schemes are posing such financial headaches for their sponsors," Marcus Hurd, principal & actuary at Aon Hewitt said. "When the final salary pension scheme liability is over a third of the FTSE 350's market capitalisation, there's no wonder that small changes in pension schemes are having a disproportionate effect on the sponsor's finances. It is the rising liabilities of these pension schemes that are causing the pain."
John Belgrove, principal consultant in the investment consulting team at Aon Hewitt said part of the blame was down to the Bank of England's (BoE) programme of quantitative easing (QE). "Schemes are in this position largely as a result of low bond yields - driven down by the BoE's QE programme of gilt purchases - and by demand from foreign buyers attracted by the relative safe investment haven status of the UK.
He said: "It's clear that pension scheme liabilities are set to remain at historic highs while current market conditions persist, so we are seeing sponsors increasingly looking towards agreeing flight plans with trustees to agree common goals and objectives. In particular, we are also seeing increased interest in implemented flight plans, where investment and trigger decisions are delegated to a third party to take swifter advantage of market opportunities."
First published 02.07.2012
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