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DB liabilities dent FTSE 100 market cap by more than reported deficits

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Pension liabilities are depressing the share prices of the UK’s 100 largest listed companies by a total of £340bn (€381bn) – almost twice as much as the firms’ reported collective defined benefit (DB) pensions deficits, a study funded by Pension Insurance Corporation (PIC) shows.

The research confirms there is a broadly one-for-one effect of pension deficits on the market value of companies but states that this is when the deficit is measured on a consistent “risk-free” basis.

The pensions shortfall being calculated on a risk-free basis is basically the same as the market adding an extra risk premium of an average of 20% to the pension liabilities as reported by the companies themselves.

PIC said extrapolating this finding for recent pension liability data implied market valuations of FTSE 100 companies were depressed by up to £340bn at the end of this August.

This figure incorporates both the the reported collective deficit of £180bn and an extra £160bn – which reflects an additional risk premium of around 20% associated with reported underlying pension liabilities of £795bn, it said.

John Llewellyn, of Llewellyn Consulting, which published the study, said: “The conclusions show that DB pension schemes continue to be large and extremely volatile elements in company balance sheets.”

Even though DB schemes are under so much scrutiny, there is obviously a disconnect between the underlying pension obligations factored in by investors and what businesses are actually reporting, he said.

“The overall impact of the liabilities on share prices must raise questions at least about the viability of dividends for some companies,” he said.

David Collinson, head of strategy at PIC, said: “As recent examples have shown, there is a material difference between what companies are reporting as pension liabilities and what is required to secure fully those pension promises should the sponsoring company become distressed.”

PIC said in its recent written submission to the Department of Work & Pensions Select Committee inquiry into DB pension funds that it did not believe companies were being entirely transparent with their investors about the level of pension risk to which they were exposed.

PIC’s main business is selling pension insurance buyouts and buy-ins to DB trustees and the sponsoring companies.

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