Pensions take a bite out of UK company profits

Pension funds continue to weigh on the UK’s largest listed companies as deficits threaten to overshadow profits, according to recent figures.

Separate reports published today by actuaries and consultants Barnett Waddingham and JLT Employee Benefits showed that despite a recovery from the financial crisis, defined benefit pension funds attached to large UK companies are mostly underfunded.

The aggregate pensions deficit at FTSE 350 companies rose by £12bn to reach £62bn by the end of 2016, Barnett Waddingham said in its annual Impact of Pension Schemes on UK Business report. The deficit is the gap between a company’s financial pension obligations and the money it holds to pay them.

This £62bn is equivalent to 70% of total pre-tax profits – which amounted to £88.9bn in 2016 – the consulting firm said.

Since 2011, this percentage has risen “dramatically”, Barnett Waddingham said. The figure was 25% five years earlier. Even at the end of 2009, when the crisis was in full swing, the deficit was equal to 60% of pre-tax profits.

The report said: “Even in years when the pension deficit has decreased, it has still risen as a proportion of profits, and the trend demonstrates the challenge facing UK companies in closing the gap.”

It said that even if profits were to remain steady for the next three years, it would only take a 0.7% fall in bond yields for the deficit to actually exceed annual UK plc profits by 2019.

The Barnett Waddingham report also found that the deficit for the UK’s top 350 companies increased as a proportion of market capitalisation in 2016, despite strong performance from the equity market.

“This trend may be particularly alarming for the 21 firms whose deficit now exceeds 10% of their market value,” the consulting firm said.

The pension problem is no less acute at the top of this range of companies.

Ten FTSE 100 companies have total disclosed pension liabilities greater than their equity market value, with 16 companies having pension liabilities of more than £10bn.

The total cost of pension liabilities at FTSE 100 listed companies grew £95bn to £681bn in 2016, JLT Employee Benefits said today. The actuarial and consulting firm said this had increased despite just over half of these companies still offering employees the scantest possible DB retirement saving options.

Charles Cowling, director at JLT Employee Benefits, said: “Times and markets are still very difficult for many companies. DB pension deficits remain stubbornly high despite all the extra contributions that have been paid.”

Cowling said he expected DB pensions to have “all but disappeared” from the private sector “in the next year or so”.

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