Pensions - Articles - Falling bond yields rise pension deficit to £115bn

 Clive Fortes, Head of Corporate Consulting at Hymans Robertson, comments:
 “The good news is most companies remain well-equipped to deal with pension liabilities due to improved earnings and company values. Nonetheless, pension schemes are still absorbing a substantial proportion of companies’ free cash with 40% of companies paying over one month’s earnings into their pension schemes. Pensions are costing companies over 2/3rds of the cost of servicing their debt and almost a third of the dividends paid to shareholders.

 “Notwithstanding recent market experience, our research found that half of FTSE 350 companies have un-hedged liabilities in their pension scheme of more than 10% of market capitalisation. It is these companies that will be suffering the most from recent falls in bond yields and who may be under pressure from pension scheme trustees to divert more of their earnings into the pension scheme.

 “While companies may be reticent to de-risk their pension schemes while interest rates are at historic lows, we would encourage companies to look at the level of risk to which they are exposed in the context of their business. Companies need to develop their own risk management strategies for their pension schemes if they are to control the impact that their pension schemes have on their business.”

 The research shows that companies remain well-equipped to deal with pension liabilities because of improved earnings and company values. A third of FTSE 350 companies reported an increase in earnings over the past year and, as a result, 82 per cent of companies can now pay off their IAS19 deficit with less than 6 months of earnings, compared to 75 per cent in 2010/11.

 While most companies remain well -equipped to support their pensions, for a handful it remains a significant burden. Four have un-hedged pension liabilities of more than twice their market capitalisation and four companies would need two years’ earnings to pay off the deficit.