The affordability of defined benefit (DB) schemes has increased dramatically among the UK’s largest listed companies, with the payoff period for IAS 19 deficits now below 30 days.
New research from UK consultancy Hymans Robertson showed the typical FTSE 350 company could now pay off its scheme’s IAS 19 deficit with only 29 days of earnings.
This is due to rising earnings with the UK corporate sector, and improved funding levels despite declining bond yields.
However, while the average figure for FTSE 350 companies has fallen, the spread among the corporates still raised concern.
Hymans’ figures showed two companies needed more than two years of earnings to cover IAS 19 deficits, including Balfour Beatty – the engineering and construction firm – needing 1,166 days.
Some 83% of the FTSE 350 firms could cover deficits with six months of earnings.
The security of pension funds, as defined by the size of the IAS 19 deficit in relation to the firm’s market capitalisation, remained stable at 1%, down from 6% in 2009.
Hymans said the market capitalisation of the firms with DB outfits stayed around £2.1trn, while earnings increased significantly.
“Actual spending on DB pensions has decreased from £16bn (at April 2013) to £15bn (at April 2014),” Hymans Robertson said.
In 2014, pension contributions were 25% lower than the firms’ interest payments to service debt and is near 80% lower than dividend payments, Hymans said.
Despite the increased affordability of schemes, Hymans Robertson partner Jon Hatchett said companies and schemes should avoid the temptation to storm towards full funding.
“It may seem counterintuitive, but racing towards full funding increases risk significantly,” he said.
“Slow and steady funding, with limited exposure to investment risk, significantly reduces the possibility of deficits worsening over the next 20 years.
“The Pensions Regulator has given the green light to this approach and companies should be strongly considering it,” he added.
No comments yet