Pension scheme deficits in FTSE 350 companies remained broadly constant over 2004 despite rises in equity markets, according to research by Mercer Human Resource Consulting. Projections for 31 December 2004 year-end accounts suggest that deficits fell only slightly from £73 billion to £71 billion over the year.
The forecasts revealed that pension asset values rose by around £33bn in 2004, but scheme liabilities increased by a similar amount.
“The findings highlight that deficits will not magically disappear, even in relatively calm market conditions,” says Tim Keogh, Worldwide Partner at Mercer. “Many employers are now bracing themselves to contribute more money in order to make a dent in scheme deficits.”
The FTSE350 companies account for just over half of UK occupational pension schemes in term of fund assets; the deficit for all UK pension schemes is estimated at £128 billion. These figures are calculated on the basis of the UK accounting standard FRS17, which uses a similar approach to the international standard IAS19 being adopted this year, and are lower than the deficits that would arise if schemes were to wind up.
The research also reveals the impact of pension scheme deficits on company value. While the scheme deficit in the average FTSE350 company represents only 3% of market capitalisation, in 25% of companies this figure exceeds 9% and in 5% of companies it exceeds 28%.
“In theory, a typical company’s share price should be reduced by just 3% as a result of a pension deficit, but in a significant minority of cases the figure is much higher,” says Keogh. “It is an exception rather than the rule for a pension scheme deficit to be a critical company issue. Both investors and pension scheme members need to focus less on actual scheme deficits and more on the ability of companies to fund them.”