UK - Twenty-nine companies in the FTSE 350 have pension deficit contributions that exceed free cash flow, according to research conducted by Barnett Waddingham.
According to the consultancy, for more than 70 companies, annual defined benefit (DB) deficit contributions are higher than the contributions being paid to finance pension benefits being earned each year for current employees.
For the majority of companies, the DB scheme deficit is a manageable annoyance, Barnett Waddingham said.
But for more than 10 companies, the deficit exceeds 20% of the market capitalisation of the company, and for 39 companies, it exceeds 20% of the equity value (after removing the pension scheme liability).
The research also finds that more than 25 companies in the FTSE 350 have pension liabilities that exceed the market capitalisation of the company, while 14 companies have an equity holding in their scheme that was more than 50% of the market capitalisation of the company.
For a significant number of companies, the DB scheme deficit is worsening the gearing ratio (a measure used to asses financial risk) by 3.4% on average, which could ultimately impact on a company's ability to raise finance.
Nick Griggs, head of corporate consulting at Barnett Waddingham, said: "The research shows the pension generational divide that exists as many of the UK's largest employers are now paying more to plug defined benefit scheme deficits than they are to fund the benefits earned by current employees each year."
In other news, Pension funds should be wary of how long equity markets can continue to rally in light of warning signs similar to those of the summer of 2007, Pension Corporation has warned.
The organisation said arranging risk transfers such as buy-ins and buyouts was still at the most affordable rate since the summer of 2008, but warned that this could change if credit and equity markets destabilised.
David Collinson, co-head of business organisation at Pension Corporation, stressed that the "clear divergence" between bond and equity markets should be a matter of concern to trustees.
"We saw the same thing in summer 2007, and 18 months later, in March 2009, pension fund deficits had widened significantly due to plunging asset markets and volatile liabilities," he said.
He warned that if a sovereign default were to occur, it could result in pension deficits rising by more than 40%.
Collinson said: "Trustees should consider how long equity markets can continue to rise, especially given the red lights flashing in the fixed income markets, and perhaps review what they might have done during the summer of 2007 with the benefit of hindsight."
Releasing its risk transfer index for the second quarter, Pension Corporation said buyouts and buy-ins for only pensioners was currently only marginally above full funding, estimating it would cost around 105% of funding levels.
However, the organisation noted that examining the situation for deferred members was less ideal, with the longer duration of deferred liabilities meaning any insurance pricing would be more exposed to a volatile market.
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