Top 100 firms see £2.4bn of 'irrecoverable' surpluses
UK - The overall funding position of the FTSE 100 pension schemes has fallen to a deficit of £8bn (€10bn) in the last year, while at least 20 companies have reported a total irrecoverable surplus of £2.4bn under new accounting standards.
In its latest quarterly report on 'The FTSE 100 and their pension disclosures', Pensions Capital Strategies (PCS) revealed clarification of the IAS19 accounting standards, IFRIC14, could "dramatically" affect pension surpluses and deficits in 2008 accounts.
Under IAS19 accounting rules, the financial position of a pension schemes is included on the balance sheet of a company, however accounting standards have recently been tightening up the circumstances in which a scheme surplus can be classed as a company asset.
The IFRIC14 statement clarifies the guidance and sets down a few more rules on when surpluses can be treated as an a asset, including a shift stating if a company cannot actually use the money in the surplus it cannot be classed as an asset and it becomes an "irrecoverable surplus".
Charles Cowling, managing director of PCS, said since the clarifications were published, a number of companies are showing pension surpluses as irrecoverable.
The report showed at June 30 2008, 20 FTSE 100 companies, including British Airways (BA), Rolls-Royce and Cable & Wireless, had reported irrecoverable surpluses totaling £2.4bn.
Of these, the largest was BA, which reported an irrecoverable surplus of £1.2bn, equivalent to 47% of the market value of the company, while Cable & Wireless showed a surplus of £405m and Rolls-Royce reported a figure of £114m.
Following these changes, PCS said there is "significant evidence emerging" of pension schemes moving to reduce the mismatching of pension assets to liabilities.
The average pension scheme asset allocation to bonds has increased from 35% to 40% over the last 12 months, representing the largest one-year shift in investment strategy for 20 years according to PCS.
Cowling said the treatment of surpluses is "yet another reason why you would expect to see a shift into bonds", as in situations where a scheme has an irrecoverable surplus "why would it take on risk with the investment strategy, as it would not see the upside of any boost in equities, but any falls could turn the surplus into a deficit".
The report showed Morrison was the latest company to report a large switch into bonds, increasing its allocation from 17% to 41%, although Rolls-Royce completed the biggest move into bonds, increasing its investment from 32% to 74%, following agreement with its pension schemes to adopt a "lower risk" investment strategy. (See earlier IPE.com article: Rolls-Royce secure pensions top-up deal)
Findings from the report showed 25 FTSE100 companies now have more than 50% of assets in bonds, although the move to liability matching strategies has not limited the level of pension liabilities, as it slightly increased from £379bn to £381bn in the 12 months to June 30 2008.
PCS revealed 13 companies now have pension liabilities of more than £10bn, while 21 companies have pension liabilities of less than £100m, although it claimed attempts by many companies to slow the growth of pension liabilities by closing defined benefit (DB) schemes to new entrants "have had little impact" compared with increasing life expectancy.
However, while the overall deficit of FTSE100 companies deteriorated by £12bn to £8bn in June, PCS claimed the total buyout solvency deficit improved from £200bn to £110bn, partly because of the competitive pricing resulting from new entrants to the market.
In addition, the report claimed that as funding levels improve, there is evidence of a "slowing down" of additional funding, as the total amount contributed to FTSE100 pension schemes fell from £14.3bn to £12.6bn, of which £4.7bn went towards reducing pension deficits.
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