FTSE 100 cash pension deficit passes £300bn
UK - The total cash amount needed to meet the deficits in FTSE 100 defined benefit (DB) schemes now exceeds £300bn (€349bn), according to global accounting and consultancy firm Deloitte.
Analysis by the firm calculated the finding position of each FTSE 100 firm's UK pension arrangements - using assumptions relied on by trustees for assessing future cash contributions - to reveal a figure more than double the estimated shortfall of £130bn at the start of 2009.
The cash funding shortfall figure of £300bn - the highest level recorded - revealed the deficit worsened by £120bn in the second quarter, resulting in many companies receiving "demands for huge contributions to their pension schemes in order to repay losses made on investments". (See earlier IPE article: Quantitative easing has 'distorted' pension liabilities)
However, as the current rate of cash contributions has already become unsustainable for many firms, Deloitte highlighted the growing use of non-cash contributions where companies move capital and assets - such as real estate or the value of brands and other investments - from the balance sheet to the pension fund.
David Robbins, partner in the pensions consulting practice at Deloitte, said: "If pension funds had to rely purely on cash contributions from companies it could, at the current rate, take more than 50 years to clear the aggregate pensions deficit."
He pointed out this position will not be acceptable to pension plan trustees but significant cash contribution increases would be unaffordable for companies, so "the solution that companies need to consider is to transfer the value of their assets to the pension scheme. There are some interesting and innovative ways to do this."
This growing use of contingent assets has also been highlighted by Towers Perrin, as it warned companies need to adopt a wider strategy in dealing with pension deficits instead of relying on one component such as dividend cuts. (See earlier IPE article: Pension deficits may cause more dividend cuts)
Deloitte said companies have in the past tried to reduce the cost of DB schemes through reducing benefits or switching to a defined contribution (DC) arrangement, but it warned "closure will not remove the issue of large pension deficits and accompanying cash demands".
"Closing the DB pension scheme to all employees is a big step which many companies have previously shied away from. However, with the current unprecedented funding levels in pension schemes and with companies being forced to cut costs in order to remain afloat, we expect to see many more pension schemes closing," added Robbins.
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