Pension deficit of UK’s leading companies equivalent to 70% of their profits


UK’s leading plcs have combined deficit of £62bn, with the percentage of their profits higher than in 2009 after financial crisis.

The combined pension deficit of FTSE 350 companies has risen to £62bn, accounting for 70 per cent of their profits, The Guardian reports.

The deficit as a proportion of profits recorded for 2016 is higher than at any time since the financial crisis, following a £12bn rise since 2015. The 25 per cent increase came in a second year of comparatively low profit for UK publicly listed companies.

The deficit is the gap between the expected liabilities of pension commitments and the funds that companies hold to pay for pensions.

While many have set aside billions in recent years, a trend towards rising life expectancy, combined with lower expectations for returns on investment, has put more pressure on pension schemes and seen the deficit grow.

Actuaries have warned that even a slight fall in bond yields would see the pension deficit of the plcs outstrip their aggregate profits by 2019.

The figures, in a report from the actuarial consultancy Barnett Waddingham, show the deficit has risen sharply as a proportion of profits in the past five years, from 25 per cent of the £214bn pre-tax profits of the FTSE 350 in 2011. Even in the aftermath of the financial crisis in 2009, the deficit was lower at 60 per cent.

For 21 plcs, the pensions shortfall is more than 10% of their value, which Barnett Waddingham described as alarming.

However, the actuaries said recent data suggesting years of austerity had seen gains in UK life expectancy grind to a halt could provide “welcome respite for companies”. It showed that after a century in which the rate of increase in life expectancy had accelerated, the average age of death was levelling off at 79 for men and 83 for women.

An updated financial assessment to reflect the diminishing life prospects of retired UK employees would cut the aggregate liabilities of FTSE 350 companies by about £10bn, they said.

Nick Griggs of Barnett Waddingham said: “Comparing the pension deficit to profits is a simplification, but it helps to put the scale of the challenge into context. Unless companies are profitable over the long term, they can’t generate enough cash to meet their liabilities, including the pension deficit.”

However, Griggs said, as long as “longevity increases do not provide any nasty surprises”, the deficit problem could be solved with higher returns and rises in long-term interest rates.

“The deficit is essentially the difference between two much bigger numbers, and a few gentle economic triggers could completely change the picture,” he said. “This is why many companies are not rushing to clear deficits quickly with additional cash contributions.”