Pension deficit to profit ratio soars

Pension deficits are a higher proportion of UK companies’ profits than at any time since the height of the financial crisis, standing at 70 per cent of total profits today compared to 25 per cent in 2011.

Figures from Barnett Waddingham show the combined deficits of public limited companies in the UK as a proportion of profits is now even higher than at the height of the financial crisis in 2009, where they equated to 60 per cent of profits.

Figures from JLT show that 10 FTSE 100 companies now have total disclosed pension liabilities greater than their equity market value. For International Airlines Group, total disclosed pension liabilities are triple its equity market value of £8bn while for BAE Systems total disclosed pension liabilities are almost double its £18.6bn equity market value.

According to JLT’s research, only 24 FTSE 100 companies disclosed a pension surplus in their most recent annual report and accounts, while 66 companies disclosed pension deficits. Those with the best funding positions are Royal Mail, which is running a 93 per cent surplus, while the worst funded pension scheme is TUI, which is running a 35 per cent deficit.

Barnett Waddingham says that if profits remain stable, it would take just a 0.7 per cent fall in bond yields for the pension deficit to exceed profits by 2019.

The aggregate pension deficit of UK plc firms grew by £12bn in 2016 to reach £62bn. In 2011, the pension deficit was £54.5bn – just 25 per cent of the £214bn pre-tax profits of the top 350 firms that year.

Barnett Waddingham says that the deficit could be reduced by slower than predicted improvements in mortality. The firm says had indications that longevity has not improved over the past five years been recognised in the financial statements of the FTSE350 companies last year, it would have reduced the aggregate deficit by around £10bn.

Barnett Waddingham partner Nick Griggs says:  “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.

“That said, it is also worth bearing in mind that if equity returns continue at the levels seen in the last few years, long-term interest rates rise more than expected and longevity increases do not provide any nasty surprises, the pension deficit problem could solve itself. We must remember that the deficit is essentially the difference between two much bigger numbers and a few gentle economic triggers could completely change the picture. This is why many companies are not rushing to clear deficits quickly with additional cash contributions.”

JLT Employee Benefits director Charles Cowling says: “The trend of DB closures continues at the UK’s largest companies and we expect that defined benefit pension schemes will have all but disappeared from the private sector within the next year or so.

“Our research also highlights the impact of a technical change to the accounting standards for pension disclosures in company accounts. IFRIC14 is an important part of the IAS19 framework and provides guidance on the recognition of surpluses and the impact of trustee funding requirements. This standard is currently being reviewed by the IASB and the proposed changes could have huge implications for UK companies, potentially increasing their pension liabilities by tens of billions of pounds. RBS, for one, has already anticipated these changes by including an “irrecoverable surplus” of £5.3bn, showing a massive increase in its IAS19 provision.”