By Ilonka Oudenampsen
The combined pension deficit of the FTSE Global 100 companies increased by €10bn to €300bn in the six months up to March 2012, due to falling bond yields and ongoing economic and financial challenges, according to research by LCP.
Assets grew by around 10 per cent from September 2011 to March 2012, but falls in bond yields caused liabilities to grow correspondingly.
Partner and head of LCP Corporate Consulting Alex Waite said: “The volatile market conditions in the last six months have certainly taken a toll on the pension deficits of the largest European companies. As well as hitting the €300bn mark in March, the deficit figure is now double what it was in 2010 even though companies are making contributions in the region of €40bn each year.
“Sound decision making by companies is more essential than ever to ensure that they are looking at the risks they are taking and actively managing those risks if they are not expecting them to be rewarded. Internationally, we are seeing that companies are increasingly adopting smarter investment strategies and looking at investment solutions involving transfers out to insurance companies, such as buyouts and buy-ins.”
LCP’s analysis of the pension deficit figure also warns that the impact of legislative change, including the implementation of IAS19 and new EU disclosure and funding requirements, will be felt particularly acutely by corporate pension schemes sponsors, as governments continue to address national deficits by passing the burden to companies.
However, Waite said: “The good news is that there are lessons we can learn from looking internationally, including the experiences of Japanese pensions in a low interest rate environment, and the move to defined contribution schemes in South Africa and the USA.”