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Only 5 pension schemes in the whole of the FTSE 100 are in surplus

For nine firms, their market value is lower than their pension liabilities

A survey by Pension Capital Strategies (PCS) with assistance from investment banking giant JP Morgan shows that almost 10% of FTSE-100 companies have pension deficits so huge that their whole business is under threat. The report also found that there were only five FTSE-100 pension funds with a surplus and believes that within three years, final salary schemes at top companies will be a thing of the past.

Nine FTSE-100 companies have a stock market value that is less than their pension liabilities. PCS says that this is unacceptable and could prove to be a real danger to their business. Corporate giants such as the Royal Bank of Scotland and RSA are included within these nine but the two companies with the biggest problems are British Telecom and British Airways who have pension liabilities that are triple their equity value.

Even though pension deficits have been funded enormously over the last year, the total deficit of the FTSE-100 companies remains at the same level as it was 12 months ago, £66 billion. While deficit funding was £4.4 billion last year, it is now £11 billion. Royal Dutch Shell were the biggest spenders in this regard, investing £2.7 billion into their deficit fund.

As these funds switched their investments into bonds, they missed the boat with regards to the increase in equity markets earlier this year. In 2007, there was only 34% invested into bonds whereas in 2010 this has increased to 50%.

PCS believes that because pension trustees are still feeling the pinch of the recession, they will be delighted to see companies investing in their deficit funds. It may be the case that they will take other assets such as property over cash. Sainsbury’s and Marks & Spencer have already pledged £1 billion in a property partnership deal that they hope will help trim the pension deficits they have.

In the last year the total pension liabilities that have been disclosed by FTSE-100 companies has risen by £28 billion to £410 billion with 14 companies suffering a £10 billion or more deficit fund. Royal Dutch Shell have a £39 billion deficit with half a dozen companies including Barclays and BP reporting deficits of over £25 billion.

Although deficit funding is on the rise, there has been a reduction in the amount of pension benefits to staff. The managing director of PCS, Charles Dowling, noted that staff benefits fell by 15% which was a clear sign that final salary pension schemes are about to bite the dust. He went so far as to predict that these schemes could be completely removed from large companies within three years. Mr. Cowling stated that the current rate of reductions would see the end of final salary schemes in six years but the likely acceleration will bring them to a halt by 2013.

These schemes are facing their death kneel due to their increased costs which have came about due to decreasing interest rates, increasing life expectancy, tax alterations and low investment returns.

Alliance Boots, a health and beauty company, is ending its final salary scheme for current employees while in 2009, Barclays Bank had to tell 18,000 staff that their defined benefit scheme was to be closed down and replaced with a more cost effective defined contribution pension plan. BP’s new employees lost their scheme which cost £11 billion earlier on this year.

The top five companies in terms of pension schemes are the London Stock Exchange, Investec, Land Securities, Prudential and Old Mutual.

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