UK - Rising equity markets have resulted in a slight easing of corporate scheme deficits, research by Mercer Human Resource Consulting reveals.
Mercer’s analysis of the latest FTSE350 annual reports with year-endings of December 31, 2003 showed that deficits fell from £74bn to £64bn over the year.
European partner Tim Keogh said it was striking that double-digit asset returns over 2003 had been matched by a double-digit growth in liabilities.He said: “Liabilities have grown due to a downward pressure on bond yields used to measure liabilities, and increased allowances for longevity.”
He claimed there was an increasing recognition among companies that deficits must be addressed.
The research found that the median contribution paid by companies exceeded the value of new benefits accrued by 18%, while 18% of employers more than doubled their pension fund contributions.
Keogh said: “More companies now realise that deficits will not go away by themselves. They are gritting their teeth and recognising the need to increase contributions.”
He added: “It would be great if equity markets suddenly boomed again or if bond markets offered the higher long-term yields that would make deficits disappear. But sensible financial planning needs to be based on more than hope, and the markets are likely to address only part of the problem.”
Mercer claims the research also reflects the increasing polarisation of pension scheme deficits. It found that, on average, deficits represent only 35 of market capitalisation but in one in 10 companies the figure is 20% or more.
Keogh said a 3% dent in company value from the pension scheme was important but hardly a disaster.
“In most cases shareholders and scheme members should be able to strike deals over contributions and benefit levels which serve both parties’ interests.
“But the impact of pension deficits on company value is far greater for a small but significant minority, and shareholder and member interests can diverge sharply. Resolving issues in these situations remains a bigger challenge.”
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