Workplace pension shortfalls are still weighing heavily on companies with big deficits even though rising returns on investments suggested they might pull out of the red.
BT Group has reported a growing pension gap despite increasing gilt yields.
Many workplace pensions invest heavily in equities and gilts as a safe haven for their funds.
In recent months, both have seen better yields than in many years. This led pension experts to believe that rather than companies having to pay in billions of pounds to make up their deficits, the debt would decrease as returns on investments reduced the deficits.
However, BT Group’s figures showed that in the last three months of 2013, the gap was bigger rather than smaller – rising from £6.7 billion at the end of September to £7.3 billion at the close of December.
Inflation hits returns
BT explained that inflation has added to the cost of retirement benefits. Paying out more from the fund has wiped out any expected gains from better investment returns.
One independent adviser has warned the BT problems were likely to reflect in the pension accounts of other companies as they all face the same inflation issues and invest their funds along the same lines as BT.
The result is companies will still find pumping cash into pension deficits will be a drain on cash flow.
This diverts money from expanding businesses and puts a dampener on their overall performance.
“Returns from investments have not seen deficits close during the past year, so companies still have to fund cash to close the gap,” said the adviser, John Ralfe.
Seeking pension exit routes
“Even though returns were boosted by 20% last year, FTSE100 companies have seen a similar rise in the cost of pension fund liabilities.”
He also explained that accounting rules based on corporate bond yields rather than gilts make the deficits seem bigger. Corporate bond yields run at double those of many gilts, and as the pension fund investments are mainly in gilts than corporate bonds, the paper figures are often larger than the actual returns.
The result is many workplace pension schemes may look to deals with third parties, like insurance companies, to take over their pensions, which removes the debt from their balance sheets.
The average FTSE100 company has an average 56% of a fund in gilts, compared to just over a third six years ago.
