Final salary pension threat to FTSE firms exposed in report

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The 'precarious' position of some of Britain’s biggest final-salary pension schemes has been laid bare.

A report by leading consultancy JLT Pension Capital Strategies has revealed that many FTSE 250 companies owe more in pension promises than their total share value.

It comes as pension experts warn that the Bank of England's fresh round of money printing, known as quantitative easing (QE), will heap huge extra burdens on schemes.

Among the 21 firms with liabilities greater than their value are technology firm Invensys, transport operator First Group and life insurer Phoenix Group.

Some 20 firms struggled with liabilities of over £1bn. The worst case is Premier Foods, weighed down by liabilities almost seven times greater than its value.

The report warns that schemes run by a ‘significant number’ of FTSE 250 companies now represent a ‘material risk’ to the business, and argues that the situation is getting worse.

The collapse of share prices and falling gilt yields has both widened deficits and increased liabilities, the report says.

Most firms have been forced to close their generous final-salary schemes to new joiners due to spiralling costs.

Huge concern over QE impact

The Bank of England's new round of £75billion worth of quantitative easing could have disastrous effects on pension schemes.

When the Bank announced the first round of QE in March 2009, pumping £200billion into the economy, it added about £70billion to pension scheme liabilities, according to Pensions Investment Corporation.

Estimates suggest the latest round could add £25billion more.This is because pension fund liabilities are calculated with reference to bond yields. QE is expected to push bond yields lower, reducing the returns made by pension funds, which are heavy investors.

Firms will have to stump up more cash to cover the shortfalls.

The National Association of Pension Funds is very concerned over the potential impacts on schemes already struggling to stay afloat. It is writing to the Pensions Regulator to discuss ways to soften the blow.

Joanne Segars, chief executive of the NAPF, says: 'A strong and growing economy is essential for the long-term sustainability of UK pensions. quantitative easing is a price worth paying, but only if it is successful in delivering the growth that businesses and pension funds need.

'But this measure has adverse consequences for pension funds in the short-term. Quantitative Easing makes it more expensive for employers to provide pensions, and will weaken the funding of schemes as their deficits increase. All this will put additional pressure on employers at a time when they are facing a bleak economic situation.'


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