True Cost of DB Schemes to Plan Sponsors Revealed

16 August 2012 (PLANSPONSOREurope.com) – It would take more than a year for 29 FTSE 350 plan sponsors to repay their defined benefit (DB) scheme deficit using all cash generated from day-to-day operations, according to research from Barnett Waddingham.

The research on FTSE 350 companies, carried out with input from the Centre for Global Finance at the University of the West of England, reveals:

• More than 49 companies in the FTSE350 have deficit contributions that exceed their free cash flow;
• DB deficit contributions represent, on average, 1.1% of total revenue for FTSE350 companies;
• For 75 companies in the FTSE350, annual DB deficit contributions were higher than those being paid in respect of pension benefits being earned each year for current employees;
• Over the last three years, deficit contributions to DB schemes have consumed 4.5 months’ worth of cash generated by FTSE350 companies’ core activities;
• 78 companies in the FTSE350 could have funded a buy-out of their pension scheme at the end of 2011 using their cash holdings. Of these, 24 companies could have done this using only the extra cash holdings built up over the course of the year;
• Schemes’ equity holdings reduced from 49% to 43%, as a result of falling equity values relative to bonds as well as gradual de-risking as schemes mature. For 16 companies, though, their schemes’ equity holdings still exceed 50% of the market capitalisation of the company;
• For 80% of companies, changes in real yields have been a greater source of volatility than changes in equity markets.
 
Barnett Waddingham Head of Corporate Consulting  Nick Griggs said: “Despite the significant level of contributions, DB scheme deficits remain a concerning issue.  Many companies continue to take a longer term view on the funding and investment strategy for their DB scheme. This is evidenced by the investment risk being taken and the number of companies that have increased their cash holdings to a level which might allow them to realistically consider a full scheme buy-out, which so far they have chosen not to do.

“A small number of high-profile companies are often highlighted for the size of DB pension obligations, but our research shows they are by no means alone. There are a number of options available to companies’ looking to manage their DB scheme liabilities. If the EU’s proposals to extend the requirements of Solvency II to include DB schemes, which would significantly increase funding requirements, are not stopped, then we would expect more companies to use the cash holdings they have built up to accelerate the de-risking of their DB scheme.”

“Our research continues to show the low levels of contributions being paid to provide pension provision for current employees relative to the amount still being paid to clear DB scheme deficits.  New auto-enrolment requirements are being introduced later this year, but these will do little to tackle the significant generational divide in the level of pension provision that will develop over the next twenty years.”

PLANSPONSOREurope Staff
editors@plansponsoreurope.com