Pension deficits reach 70% of UK's top companies' profits


According to JLT Employee Benefits, the total cost of pension liabilities among FTSE 100 companies grew to £681 billion in 2016, The Daily Telegraph reports.

The aggregate pension deficit of United Kingdom plc firms grew by £12bn in 2016 to reach £62bn, which is equivalent to 70% of total pre-tax profits (£88.9bn) for the year.

In 2016, the deficit rose by £12bn to £62bn, equating to 70% of the £88.9bn in total pre-tax profits for the year.

Quantitative easing policies, with central banks purchasing securities to increase the money supply, are also playing a part in the deficit rise, said Tom Selby, senior analyst at AJ Bell.

Last year's shortfall "is now even higher than it was in the immediate aftermath of the financial crisis", the report said.

Furthermore, if profits were to remain steady for the next three years, it would only take a 0.7% fall in bond yields for the deficit to actually exceed annual United Kingdom plc profits by 2019. A year on from the financial crisis, the deficit was only 60% of pre-tax profits.

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The pension problem is no less acute at the top of this range of companies.

According to the findings, 10 companies now have total disclosed liabilities greater than their equity market value, with Royal Dutch Shell topping the list with £73bn of liabilities. For International Airlines Group, total disclosed pension liabilities are triple its equity market value of £8 billion while for BAE Systems total disclosed pension liabilities are nearly double its £18.6 billion equity market value. "This report shows that the trend of DB closures continues at the UK's largest companies and we expect that DB pension schemes will have all but disappeared from the private sector within the next year or so".

This increase has happened despite firms barring new employees from their defined benefit schemes and increasing funding by more than £4bn, the research showed. However, JLT says that this is having little to no impact on reducing liabilities.

After allowing for the impact of changes in assumptions and market conditions, JLT estimates that ongoing DB pension provision fell approximately 12 per cent in 2016.

FTSE 100 firms are continuing to battle significant deficits, with the total deficit in FTSE 100 pension schemes at 31 December 2016 estimated to be £87 billion, up from £17 billion a year earlier.

Commenting on FTSE 100 companies' struggle to reign in their pension liabilities, Charles Cowling, Director, JLT Employee Benefits, says: "Times and markets are still very hard for many companies". Steady increases in life expectancy have also increased the amount that pension schemes are expected to pay out.