The negative effect of scheme liabilities on their FTSE350 sponsors is increasing, research by Barnett Waddingham shows.
The survey, conducted in conjunction with the Centre for Global Finance at the University of the West of England, found 49 companies had deficit contributions greater than their free cashflow, up from 29 last year.
Deficit contributions also accounted for more than 1% of total revenue for the FTSE350 and for 75 companies, deficit contributions were higher than the value of benefit contributions.
Some 78 companies said they could fund a buyout of their deficit with cash holdings however, with 24 of them claiming they could do so with excess cash amassed in 2011 alone.
Sixteen schemes had equity holdings exceeding 50% of the company’s market capitalisation, although overall equity holdings reduced from 49% to 43% over the year.
Meanwhile, the majority of companies found changes in real yields a significantly greater source of volatility over 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 buyout, 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.”
This came as the Pension Protection Fund (PPF) announced the aggregate deficit of the 6432 schemes in the PPF 7800 index increased over the month of July to £283bn, from a deficit of £267bn at the end of June.
Elsewhere, Mercer data revealed the aggregate IAS19 accounting deficit for FTSE350 DB pension schemes increased over the month of July to £75bn (equivalent to a funding ratio of 87%) compared to a deficit of £70bn at the end of June – an increase for the third month in a row despite one of the strongest months for asset values this year.
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