FRS17 Produced Pension Deficits at 90% of Companies

Watson Wyatt found in a study that the 20% fall in the UK stock market since the beginning of the year has led to a $107.4 billion pension deficit, Dow Jones reported. For example, actuarial consultant Lane Clark & Peacock previously put the figure at $38.2 billion.

Under a final salary retirement plan, employers are guaranteed a certain level of pension benefits at retirement, but the company runs all the risks, particularly when it comes to investment returns, Watson said.

The reason for these massive deficits is that a high proportion of Financial Times Stock Exchange 100 companies’ pension funds still invest very heavily in equities, according to the study.

Average Allocation

Watson Wyatt, said the average equity allocation was 64%. Only around 10% of companies had less than 50% of their pension plan invested in equities and some are maintaining an equity allocation as high as 90% or more, the Dow Jones report said.
An FRS17 Postponement

Although the UK Accounting Standards Board recently proposed a postponement of the full introduction of FRS17, companies will still have to disclose FRS17 figures in the notes to their accounts, enabling analysts and investors to see the effect on companies’ results were FRS17 fully in force.

One ray of light in the study was Watson Wyatt’s determination that, for a typical company, if returns of 3.5% and real capital growth of 2.5% are achieved, the FRS17 deficit could be wiped out over a period of around 10 years, without the need for additional contributions.

However, this assumes that companies will continue to invest the major portion of their pension funds in equities. Watson Wyatt said the stock market falls over 2002 will have reduced the typical proportion invested in equities by nearly 10%, according to Dow Jones.