Poor performing stock markets have pushed the total deficit in UK company schemes under the accounting standard FRS17 to an estimated £70bn (e110bn), according to Watson Wyatt which estimates that nine out of 10 company schemes are now in deficit.
The report follows a study from UBS Warburg which reports £28bn of the total deficit for UK companies is accounted for by FTSE 100 companies alone. UBS’s report, FRS17 One Year On, reveals 10 FTSE 100 companies have a combined, estimated shortfall of £13bn.
The worst to be hit under FRS17 is Rolls Royce, which has a deficit of £1.1bn, or 50% of its market value. BT, Royal & SunAlliance, BAE Systems, J Sainsbury, Lattice Group, ICI, GKN, British Airways and Centrica were also named among the top ten.
The figures, which exceed other recent estimates, are attributed to the fact that many of the companies have maintained high equity exposure.
According to Watson Wyatt and UBS Warburg, the average equity allocation of UK company schemes is around 65% and only around one in ten has less than 50% of the scheme’s assets invested in equities.
In contrast to the Boots pension fund, which sold its entire equity and short-term bond investments last October in favour of bonds, companies such as Granada and Vodafone maintain respective equity holdings of 100% and 90%.
The reports remain relatively optimistic about longer term prospects. Even though equity markets have performed abysmally in recent months – the FTSE has fallen 20% since January – the long-term expected return is around 7%, compared with 5% for fixed income.
If companies weather the storm and continue to invest largely in equities, the FRS17 deficit could effectively be wiped out in the next 10 years.
John Ball of Watson Wyatt illustrates the importance of careful consideration before trading in equities for bonds: “a switch by FTSE 100 companies of 20% from equities to bonds could reduce their disclosed annual profits by around £1bn in total”.