EUROPE - The combined pension deficits of FTSE 100 companies soared by more than 70% in the past year to €290bn, and the situation is unlikely to improve in the near future due to new IAS19 requirements coming into force, a new report has found.
According to the 'European Pensions Briefing' report published by consultancy LCP, the €120bn rise came despite of the record scheme contributions made by UK companies over the past year.
Alex Waite, partner and head of LCP Corporate Consulting, said: "The year ahead looks like it may well bring one burden too many for European pension schemes.
"Pressure to deal with new pensions accounting under IAS19, volatile markets and regulatory uncertainty are likely to lead to further pressure for organisations to reform pension plans in every one of the many countries where our clients operate."
The consultancy also said the application of Solvency II-type principles to pensions would call into question "the rationale and sustainability" of defined benefit plans in many European countries.
LCP stressed that new pension accounting rules could present additional risks for multinationals at a time of severe economic crisis.
Phil Cuddeford, partner at LCP and co-author of the report, said: "Analysts, lenders and shareholders will take a long hard look at companies' 2011 annual report and accounts in the light of the new accounting changes.
"Those that have taken steps to manage pension risks will send a clear and confident message to the markets. Those that haven't may well find they are judged harshly by markets and lenders increasingly concerned about pension risks."
The three main changes under IAS19, effective from the end of this year, will include a ban of the 'corridor method' - which allows deferral of some of those gains or losses - a ban of expected returns and an increase in disclosure.
According to LCP, the ban of the corridor method will be a particular issue for Dutch companies and will reduce shareholder equity by €16bn, while the ban of expected returns will decrease the profits of 66 of the FTSE Global 100 by a total of €14bn.
"The good news is that there is plenty that companies can do to prepare for the challenges ahead," Cuddeford said.
"De-risking through cutting benefit accruals, de-risking investment strategies, offering members the option to leave schemes and using insurance-based solutions such as buyouts and buy-ins are all ways to batten down the hatches for the storm ahead."