UK- Rolls-Royce has warned that it may have to pay out a further £35m (e55m) next year in order to plug the shortfall in its main UK pension fund. The group already makes annual contributions of £72m (e113m).
Latest estimates put Rolls-Royce’s deficit at around £700m (e1.1bn) but it has been the subject of much discussion recently. Preliminary results for last year put the hole at £400m and Rolly Royce said at the time that a 15% rise in equity markets would abolish it.
Since then, however, the market has fallen 20% dealing a blow to the 70% of the portfolio invested in equities.
Chief executive John Rose says the figure of £700m is essentially an update and that and the funding requirement of £35m only an estimate. The exact sum needed to plug the hole will not be decided until the fund’s actuarial valuation next March.
Rose further insists that the underlying business is in good shape and that the extra £35m will not prove a problem. The scheme in question has been closed to new entrants since 1999.
In a recent survey by UBS Warburg, Rolls-Royce was identified as the FTSE 100 company to have the largest pension deficit relative to its market value. The survey estimated the shortfall to be around 50% of Rolls-Royce’s market value at around £1.1bn (e1.7bn) before deferred tax benefits.
On a positive note, Rolls-Royce’s interim results show a trimming of its average net debt forecast over the year from £1.3bn (e2bn) to £1.2bn (e1.9bn), and the group’s cash outflow to be much lower than expected - issues that have been of concern to investors over recent years. The news resulted in Rolls-Royce’s shares gaining 15% by the end of Thursday’s session.
Standard & Poor's Ratings Services says its credit ratings and outlook for Rolls-Royce (A-/Negative/A-2) will not be affected by the company's pension fund deficits and first-half results.
UK retailer John Lewis joined Rolls-Royce in announcing the widening of its pension fund deficit. The group estimates its deficit to be £200m (e313m) under the new FRS17 accounting standard. The scheme will be under review until November.
One subject that will have to be addressed is the group’s generous funding principles - the scheme is currently funded through contributions from the company itself, with employees only making voluntary extra contributions. John Lewis says, however, that radical changes are unlikely.