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Fears over FTSE 350 pension deficits overblown, consultancy says

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A study by consultants Hymans Robertson has challenged the view UK corporates are facing a bill for defined benefit (DB) pension provision that in the long term will prove unsustainable.

In a series of findings that fly in the face of the popular view that DB pension deficits are spiralling out of control, Hymans Robertson observed that a typical FTSE 350 company has a deficit of just 1% of its market cap.

What’s more, 90% of companies have a pension deficit of less than 10% of market cap.

In the foreword to the report, ‘FTSE 350 pensions analysis: Putting Pensions in Context’, the consultancy writes: “FTSE 350 companies do not have an overwhelming pension deficit problem. Instead, companies are exposing too much shareholder value to pension risk.”

The focus on headline pension deficits and, in particular, the speed with which companies can bring them under control, is driving companies to ignore the risks, the report added.

Clive Fortes, head of corporate consulting at Hymans Robertson, told IPE: “There may well be a story of two halves to the landscape, with the FTSE 350 being the one half and the rest of UK companies being the other half.

“Although a pension deficit might be a concern for a minority of the FTSE 350, 90% of companies in the FTSE 350 have deficits that are less than 10% of market cap. That is hardly a life-threatening situation. The position for the rest of UK companies is probably less rosy.”

But nor, he said, should sponsors rush headlong into pouring money into a scheme.

“I don’t believe companies should pay to close these deficits as a matter of urgency,” he said. “There is no magic to being 100% funded as opposed to, say, 95% funded or indeed 105% funded.

“After all, these liabilities are set to run for 60-80 years, with the bulk of the liabilities payable over the next 20-30 years, and one thing we do know is that the assessment of the liabilities will be wrong.”

Dan Mikulskis, a director with investment Redington, told IPE he endorsed this view.

“I would agree neither pouring money into a fund nor closing it are necessarily the only or even the most effective ways to reduce risk to the sponsor,” he said.

“The key to managing a risk and getting on top is to set clear goals and objectives for the level of return and risk the pension scheme will target.

“Among these will be a clear determination of the amount of risk a sponsor (and trustees) can carry.

“You also need to review progress against these objectives regularly and instigate the necessary calls to action if they are not being met.”

As for the wider thrust of the Hymans Robertson’s report, Mikulskis said his experience of the market was consistent with its findings.

“Overall, in a relatively short space of time, if you directly address the risks in the pension scheme, including interest rates and inflation, you can really get on top of the issue and make a lot of progress toward reducing deficit volatility.

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