Overall, FTSE 350 companies contributed substantial sums of money to their pension schemes last year to reduce deficits, according to research by Mercer Human Resource Consulting. For every £100 contributed to cover new benefits, companies paid an average of £65 extra into their schemes.
But most of these extra contributions were accounted for by just 25% of companies said Mercer. A quarter of FTSE 350 companies paid more than twice the cost of existing benefits, so for each £ 100 contributed to cover current pensions, more than £100 was paid against deficits. The rest of the companies contributed less than £10 extra on average for every £100 of new benefit value.
Tim Keogh, Worldwide Partner at Mercer, commented: “Interestingly, the companies that contributed the most money did not have the worst-funded pension schemes. These employers probably felt that reducing their scheme deficits was in the best interests of both members and shareholders.”
He added: “Although the overall figures paint a positive picture, many companies are still not making substantial extra contributions to pay down deficits. Unless higher contributions are made in future, schemes will rely almost entirely on favourable investment performance to meet their commitments.”
The investment performance required to clear pension deficits is substantial. Based on companies’ own “best estimate” assumptions, most employers will take an average of 12 years to eliminate their deficits measured under the FRS17 accounting standard. “Questions remain as to whether this rate of progress will be acceptable to the new Pensions Regulator, which proposes that deficits must be corrected as soon as practicable,” said Mr Keogh. “There are no margins for prudence in these calculations – eliminating the deficits within 12 years is a 50/50 call, and it could take far longer if investment performance is poor.”
The research found that pension schemes’ investment in equities continued to fall, but only very gradually. On average, schemes invested 59% in equities at the end of last year compared to 60% at the start of 2004. This 1% reduction in equity holdings is closer to 3% when allowing for relative market movements. Some of this change was accounted for by bond investments but “other” investments, for example in alternative assets, increased from 4% to 6%. Therefore, the overall level of investment risk taken by schemes remained broadly the same as in 2003.
Although investment returns exceeded expectations last year, funding levels did not increase as many schemes changed their actuarial assumptions to take account of higher life expectancy. December 2004 year-end accounts for FTSE 350 companies showed that the aggregate deficit was £76bn – up slightly from £73bn in 2003.