UK - Almost 50% of companies in the FTSE 350 that operate a defined benefit (DB) scheme could pay off the deficit with less than six months earnings. But eight companies, including British Airways, BT Group and ITV would require more than five years of full earnings, a study by Hymans Robertson has revealed.

Findings from its second annual report on FTSE 350 pensions analysis showed the aggregate funding position of the DB schemes on an IAS19 basis moved from a £16bn (€17.65bn) surplus at the end of 2008 to a £142bn deficit by 31 December 2009.

However, Hymans Robertson claimed this is more in line with what it had calculated as the "normalised" deficit of £177bn, which is based on a fixed spread for corporate bonds instead of the historically high spreads in 2008 and 2009 that "in our view understated pension liabilities", Hymans said.

Analysis of the 222 companies in the FTSE 350, which sponsor DB pension arrangements, showed the typical company's pension deficit equated to six pence in the pound of its market capitalisation, compared to 12 pence in 2008. The report attributed this to the fact that market caps have increased while deficits remained stable.

Hymans Robertson suggested the average company could pay off its deficit with just 208 days of earnings, however this varies from sector to sector. In the financial sector, for example, which sponsors around 25% of the FTSE 350 pension assets, 80% of companies have a deficit that is less than 10% of market capitalisation yet the average firm only contributes 11 days of earnings into the scheme.

Hymans Robertson said banks and insurers are in the worst position in this sector, as it noted RBS' pension deficit is 69% of market cap while its unhedged pension liabilities are 153p in the pound of market cap. Its deficit, relative to the size of the sponsoring company, is also twice as large as any other firm in the financial sector.

The industrial sector, meanwhile, accounts for 13% of pension assets. While security and affordability in the sector improved in 2009, the average pension deficit still equated to 15% of company value. The report suggested this is because of legacy pension liabilities so the average firm would need to pay in 16 months of earnings to pay off the deficit, placing UK industrials at a competitive disadvantage in the global marketplace.

Elsewhere, the retail sector of the index, which equates to 9% of DB assets, is dominated by British Airways, and this company alone accounts for 38% of pension assets in the sector. The typical deficit amounts to 7% of market cap with the ability to pay off the debt in 168 days.

But further figures from the report, however, showed British Airways is one of five companies in the FTSE 350 that has a pension deficit in excess of their market cap, with a score of 249p in the pound.  The other four firms are Trinity Mirror, with a score of 177%, BT Group at 154%, Interserve with 138% and GKN with a figure of 104%.

On the issue of affordability, BA, GKN and BT are also among the eight companies that would take more than five years, or 1,825 days, of earnings to pay off their deficit. Taylor Wimpey tops the list with a score of 7,425 days - equivalent to around 20 years - while BA comes in second with a timeframe of 3,462 days, or just under 10 years. GKN would require 3,195 days of earnings, while BT Group would take just over five years at 1,885 days. The other four companies that fall in the same category are insurers Aviva and Hiscox, as well as ITV and Invensys.

Clive Fortes, head of corporate consulting at Hymans Robertson, suggested while 'normalised' deficits have not significantly worsened, disclosed IAS19 deficits will be higher in 2010, which will lead to increased corporate awareness of pension schemes.

"Pension schemes are actually manageable for the majority of companies, and shareholder value could be improved by taking action to control pension risk. Many companies are still spending relatively low levels of corporate earnings on pensions and running significant un-hedged pension liabilities," he said.

He noted the past few years have highlighted the "damaging effects" that unhedged risks in a pension scheme can have on companies.

"Where companies do not currently do so, we would encourage them to divert more management time and resources to investigating and understanding pension risk. This will ensure that a demonstrable plan is in place to deal with pensions risk and enable companies to take advantage of market opportunities as they arise," added Fortes.

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