Company pension deficits remain ‘frustratingly high’

The combined pension deficit of FTSE 100 companies remains high, despite an improvement of £5 billion over the past year, a new report has warned.

Actuarial consultants Lane Clark & Peacock (LCP) said that although company pension contributions had increased to record levels, the combined deficit of FTSE 100 companies was still £37 billion.

The company’s Accounting for Pensions survey report found that six companies – BAE Systems, British Airways, BT, ICI, Royal & Sun Alliance and Rolls Royce – had deficits greater than 30% of their market capitalisation at the end of 2004.

LCP found that only three companies in the FTSE 100 that did not have a pension deficit – Associated British Foods, Johnson Matthey and Old Mutual.

However, nearly half of all FTSE 100 companies declared shareholder dividends in 2004 in 2004 greater than their deficits. The report said that the total of £39 billion of dividends paid to shareholders compared to the £37 billion pensions deficit.

The consultants said that the FTSE 100 Index would need to climb to above 6,700 in order to eliminate the combined deficit by this time next year.

The report said that longer life expectancy had placed a further burden on pension funds.

Cash payments into pension schemes by FTSE 100 companies now totalled £10.5 billion last year, including payments by BT and the Royal Bank of Scotland of more than £1 billion each. However, LCP warned that it could take eight years to wipe out the pension deficit if current contributions were maintained.

LCP said that new regulations would have significant impact on companies with pension schemes deficits. Any company planning to return funds to shareholders, buy, sell or merge with another company or undergo refinancing will need to pay close attention to their deficit levels.

Scheme funding requirements due to come into effect next month will also provide trustees with increased powers to negotiate with the company for higher contributions.

Commenting on the survey, Chris Tavener, partner at LCP said: "Despite record amounts of contributions by the FTSE 100 companies and a recovering equity markets, FRS17 pension deficits remain frustratingly high. New funding regulations will mean pressure for higher contributions will continue, which could lead to increasing conflict between trustees and the sponsoring company. Companies will need to balance the needs of their pension scheme members with the expectations of their shareholders."

(KMcA/SP)