The UK’s largest final salary pension plan, which just last year was 120% funded, can now only cover 96% of its liabilities, due to current stock market weakness. Some 72% of the £12.6 billion fund’s UK assets, and 80% of its US assets are held in equities, according a report from the Financial Times.
The volatility of the fund’s investments in equities is clearly visible in the group’s FRS17 declaration, an accounting rule recently drafted by the Accounting Standard’s Board. FRS17 makes the disclosure of final salary pension fund assets and liabilities mandatory.
Since companies began implementing the new regulation, a number of large UK companies have declared funding deficits in their pension plans:
- compass reported a 74% funding level, from 107% previously
- carlton’s funding level fell from 100.5% to 95.2%
- ICI’s pension plan saw funding drop from 99% to 93.8%.
Opponents of the new regulation argue that it will discourage companies from offering pension plans to their employees.
In fact, last week, House of Fraser, the department store group, reported a 81% funding level and announced that the plan would be closed to new entrants.
Other UK companies have made changes to their investment policies. UK retailer Boots placed 100% of its plan assets into fixed income securities in order to ensure pension payments to its retirees.
At present, FRS17 does not require companies to contribute to underfunded plans, however, from June next year, when the new requirements will apply in full, companies will have to reflect the shortfall on their balance sheets.