Company Pensions in the Red Despite £175bn of Top-Ups

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FTSE 350 firms have poured £175 billion in to their pension schemes to make up deficits – but a decade of throwing money at the problem has made no difference.

After 10 years, the total pension deficit of FTSE 350 firms is £73 billion, which is roughly the same amount in the red as 10 years ago, according to research by employee benefits firm Mercer.

Despite the huge input in to company pensions  amounting to 40% of the value of an average scheme’s assets, funding levels have improved by just 8% – from 78% on December 31, 2002, to 87% on June 30, 2012.

In 2002, assets and liabilities in the FTSE 350 were £282 billion and £357 billion respectively.

By 2012, assets held in the FTSE 350 increased to £501 billion, while liabilities had increased to £574 billion.

Pension deficits tracked for a decade

Mercer tracked FTSE 350 deficits –  which started the decade at £75 billion and improved to £73 billion in 2003.

Following years saw volatile rises and falls in deficits, with 2009 the worst year with funds £103 billion in the red.

Latest figures from Mercer for August show FTSE 350 deficits of £63 billion.

“The analysis illustrates the impact of the sustained fall in bond yields, equity underperformance and improving longevity over the last 10 years,” said Adrian Hartshorn, partner in Mercer’s financial strategy group.

“Even removing the impact of price inflation, 2012 liability values are much higher than they were in 2002, which can be accounted for by the falling bond yields and improving longevity. While defined benefit schemes appear to be in better health compared to 10 years ago because the funding level is higher, big deficits remain despite very large company contributions over the period.”

Firms taking risks

“Defined benefit pension risk management has improved over the decade but we remain concerned over the risk that defined benefit pension schemes continue to pose to UK companies. Companies need to make active decisions about the trade off between locking into more certain known costs of continuing to take risks that may or may not pay off.

“Our data underlines how market movements impact on pensions schemes. While many have adopted de-risking strategies, many other schemes remain invested in riskier assets, which have resulted in the volatile deficit figures. It is clear that much more can be done to manage pension scheme risk. “

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