Research from Hymans Robertson shows that reported deficits across Scotland’s plcs’ defined benefit pension schemes have almost doubled over the past 12 months, rising from £3.2bn to £6bn. This is principally due to a fall in the corporate bond yields used to place a value on company pension liabilities. The position is not expected to be any better as we head towards the end of 2013.
Hymans Robertson’s Scottish Pension Index found that of 27 schemes analysed, 18 were worse off in terms of deficit affordability than the year before. The average level of pension deficit was found to have increased by £100m, which represents 3% of market cap. The report also suggested that it would take the typical Scottish plc three times as long to pay off their deficit in full than the typical FTSE 350 company (six months vs. two months), while one third of Scottish plcs (35%) would require over a year of all earnings to clear current deficit levels.
The report warns that in focusing efforts on reducing pension deficits, the majority of Scottish plcs are overlooking the need to properly manage their schemes’ risks and liabilities. The typical Scottish plc was found to have 19p in every pound of market cap in unhedged pension liabilities Hymans Robertson also suggests that more consideration be given to tackling longevity risks relating to ageing scheme memberships, which have remained at the back of minds despite a number of recent market innovations enabling them to be hedged at a reasonable value.
Calum Cooper, Partner and Actuary at Hymans Robertson, said: “While the majority of Scottish plcs have being paying deficit reduction contributions over the past year, our report shows that the situation has worsened. It is evident that throwing cash at the problem may not be the best solution and that fully considering and managing the risks associated with their pension schemes is crucial for companies too.
“The typical Scottish plc’s scheme is carrying a significant level of unhedged pension liability, leaving itself vulnerable to situations in which investment conditions deteriorate. While the end goal of having a fully funded pension scheme is likely to take ten years for many businesses, it may be necessary to accept that managing this risk effectively means that this process might take slightly longer.
“One third of Scottish plcs have little room for manoeuvre in how they fund their schemes, with most likely to be operating at the maximum level of affordability. It is therefore important that schemes also look to implement a strategy to affordably reduce risks such as longevity, in order to mitigate the risk of further deterioration in funding.”
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