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Last week saw record lows for the yields of several corporate bonds
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This has pushed pension liabilities of the FTSE350 to the highest levels ever seen
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Deficits have increased by £50bn to £90bn* across the FTSE350 year to date
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This is despite companies contributing £16bn into schemes
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For companies reporting at the 31 December 2014 year end, this could have a significant impact on balance sheets and P&L
Looking ahead, there are several major pensions-related issues that companies need to be on top of in 2015. Figures released today from Hymans Robertson, the leading independent pensions, benefits and risk consultancy, show that the aggregate pension deficit of UK plc has increased by £50bn to £90bn* over 2014. This is despite companies contributing around £16bn year to date, according to its annual FTSE350 pensions indicator report, where it sets out its views on the 31 December 2014 reporting season as well as themes for 2015.
Commenting, Jon Hatchett, Partner and Head of Corporate Consulting, said:
“The volatility in bond markets will be of greatest immediate concern to those companies whose year-end reporting falls on 31 December 2014. In the absence of any recovery by the close of the year, the increase in pension deficits this causes could have a significant detrimental impact on balance sheets and P&L. For companies that haven’t hedged sufficiently against this scenario, the picture could look rather grim. It’s crucial that they give this due consideration now.
“These figures send a strong message to companies and pension trustees to place greater emphasis on managing the risks in pension schemes. Capital market volatility is an inescapable reality. As a consequence of this, funding levels will have dropped, which will be of concern to trustees, and accounting liabilities have reached record highs, which will be a worry for sponsoring companies.”
Looking forward to 2015, Jon Hatchett continued:
“There are a number of pensions-related issues that FTSE350 companies with defined benefit (DB) schemes need to be on top of in 2015. The most immediate is the new freedoms and choice open to DB members to drawdown their funds flexibly if they transfer to a defined contribution environment. We estimate 30-40% may do so, which could remove £100bn of risk from FTSE350 schemes and reduce long-term deficits by £15bn.
“Another change, which could be as significant as auto-enrolment, is the end of contracting out in April 2016. Companies need to begin preparing for this now, as the associated costs will be around £10bn over the coming decade. These costs will have to be borne either by companies or employees. Clearly there needs to be sufficient planning for this, but it’s not yet on the radar of many decision makers.
“And finally, a tightening of an international pensions accounting standard could seriously worsen the balance sheets and profits of some listed companies. In some cases, the tightening of IFRIC 14 could wipe out the pension scheme surplus, or cause a substantial deficit, from an accounting point of view. Companies need to consider a range of mitigating actions now.”
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