| FTSE100 pensions back into the red |
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| Written by Adrie van der Luijt | |||||||||||||||||
| Tuesday, 01 July 2008 | |||||||||||||||||
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FTSE100 finance directors have to report growing pension deficits in their half-year reports.
Stock market falls and higher inflation expectations over the past month will make balance sheets appear less healthy when companies report half-yearly updates, according to consultants at Watson Wyatt. At the end of May, FTSE100 companies’ pension funds had an aggregate surplus of £23 billion under the FRS17 accounting standard, Watson Wyatt estimated. During June, this turned into a deficit of £8 billion. The aggregate funding position has worsened by nearly £50 billion in the space of three months. Falling asset values At 30 June 2008, FTSE 100 companies had an aggregate FRS17 deficit of £8.2 billion. Liabilities are estimated at £386.5 billion and assets at £378.3 billion. There was an aggregate surplus of £1.5 billion at 31 December 2007. This rose to £40.4 billion by 31 March 2008, before falling back to £23.1 billion by 31 May. During June, falling asset values reduced surpluses by £20 billion. On their own, inflation expectations had a similar effect, adding a further £18 billion to liabilities. This was partly offset by the effect that higher corporate bond yields - which will be affected by inflation - had on the measured value of liabilities. Overall, liabilities rose by £11 billion during June. Some of the key indicators driving changes in the funding levels of pension schemes during the first half of this year are:
Rashpal Bhabra, head of corporate consulting at Watson Wyatt, says that falling share prices and news that inflation had broken through the Bank of England’s target had come at a bad time for finance directors preparing half-yearly updates. Some who could have hoped to report a pension surplus a few weeks ago will have to report a deficit instead. Spectre of inflation “If a pension fund holds equities in the hope of generating higher returns, the company knows it is in for a bumpy ride,” Bhabra notes. The thing that makes June stand out is the spectre of inflation making benefits significantly more expensive at the same time as asset values fell. There was some mitigation from an increase in corporate bond yields, but not enough to stop a deficit re-emerging for the FTSE100. The impact on balance sheets will appear most bleak for some companies providing quarterly updates. Surpluses reached a record level by the end of March, partly because of the way the credit crunch increased corporate bond yields, but pension funds are now back in the red. This is a stark reminder of how volatile the short-term funding positions reported in company accounts can be. Bhabra says that companies with defined benefit pensions have offered their staff protection against prices rising in future but have limited protection against this themselves. “Those who still have staff in defined benefit schemes will hope recent events have at least made them appreciate how valuable an inflation-protected pension can be,” he concludes. Related articles
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