Aon Hewitt, the global human resource solutions business of Aon plc (NSYE:AON), has said that the liabilities of the FTSE 350's final salary pensionschemes, as shown in their company accounts, have now reached 35% of their sponsoring companies' combined market capitalisation. This is the highest level this proportion has ever reached.
The proportion has increased significantly over recent months due to rising pensionscheme liabilities while equity markets have remained at relatively low levels. The rise in pensionscheme liabilities is largely due to the extremely low gilt yields.
The FTSE 350 pensionsaccounting deficit stood at £77bn at 30 June 2012, an increase of 40% since the start of most companies’ accounting year (31 March 2012) and up from £20bn at 31 March 2011. The FTSE 350 aggregate pensionsaccounting liability was £570bn at 30 June 2012 (up from £473bn at 31 March 2011), while the market capitalisation of the FTSE 350 on the same date was £1,623bn (down from £1,768bn at 31 March 2011).
Marcus Hurd, principal & actuary at Aon Hewitt, said:
"When we look at the figures, it's evident why final salary pensionschemes are posing such financial headaches for their sponsors. When the final salary pensionscheme liability is over a third of the FTSE 350's market capitalisation, there's no wonder that small changes in pensionschemes are having a disproportionate effect on the sponsor's finances.
“Pensionscheme liabilities have increased by 18% since March 2011 while the market capitalisation of the FTSE 350 has actually fallen. It is the rising liabilities of these pensionschemes that are causing the pain."
John Belgrove, principal consultant in the InvestmentConsulting team at Aon Hewitt said:
"Schemes are in this position largely as a result of low bond yields - driven down by the Bank of England’s quantitative easing programme of gilt purchases - and by demand from foreign buyers attracted by the relative safe investmenthaven status of the UK.
"It's clear that pensionscheme liabilities are set to remain at historic highs while current market conditions persist, so we are seeing sponsors increasingly looking towards agreeing flightplans with trustees to agree common goals and objectives. In particular, we are also seeing increased interest in implemented flightplans, where investment and trigger decisions are delegated to a third party to take swifter advantage of market opportunities."
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