U.K. corporate pension funds see rising deficit in 2016 despite better returns, higher contributions

Pension Funds

Total pension liabilities at FTSE 100 companies grew 16% in 2016 to £681 billion ($876 billion) from £586 billion, according to research conducted by consultant JLT Employee Benefits.

The total deficit in FTSE 100 pension funds was £87 billion as of Dec. 31, up from £17 billion a year earlier. Over the year, £17.6 billion was injected into FTSE 100 companies’ pension funds. The contribution was 32% higher than in the previous accounting year.

JLT said that the pension liabilities of 10 FTSE 100 companies were higher than their equity market value. For International Airlines Group, the disclosed liabilities were triple its equity market value of £8 billion, while for BAE Systems, they were are almost double its £18.6 billion equity market value, JLT found.

Charles Cowling, director at JLT Employee Benefits, said in a news release: “Times and markets are still very difficult for many companies. Defined benefit pension deficits remain stubbornly high despite all the extra contributions that have been paid and the latest mortality tables showing reductions in life expectancy. This (research) shows that the trend of defined benefit funds closures continues at the U.K.’s largest companies and we expect that defined benefit pension schemes will have all but disappeared from the private sector within the next year or so.”

According to separate research conducted by actuarial consultant Barnett Waddingham that used a different methodology, the pension deficit of U.K.’s FTSE 350 companies rose 24% to £62 billion in 2016 from £50 billion a year earlier.

Barnett Waddingham found that the deficit for the U.K.’s top 350 companies also increased as a proportion of market capitalization in 2016, despite strong performance from the equity market, and now accounts for 70% of total profits, which stood at £88.9 billion last year.

By comparison in 2011, the pension deficit constituted 25% of the £214 billion pre-tax profits of the FTSE 350 companies in that year.

Nick Griggs, partner at Barnett Waddingham, said in a separate release: “Comparing the pension deficit to profits is a simplification, but it helps to put the scale of the challenge into context. Unless companies are profitable over the long term, they can’t generate enough cash to meet their liabilities, including the pension deficit.

“It is worth bearing in mind that if equity returns continue at the levels seen in the last few years, long-term interest rates rise more than expected and longevity increases do not provide any nasty surprises, the pension deficit problem could solve itself. This is why many companies are not rushing to clear deficits quickly with additional cash contributions,” Mr. Griggs added.

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