UK - Hewitt Associates has called on companies to adopt "broad-ranging" action plans to address funding shortfalls in FTSE100 pension schemes.
Hewitt said the combined deficits for FTSE100 plans, measured using FRS17, had remained “stagnant” – between £50bn and £60bn – for most of 2004.
Raj Mody, pensions strategy consultant commented: “2004… has left companies wondering what they can do to break out of their deficit doldrums.
“Our analysis suggests that a compromise mix of solutions is the only realistic option for most companies. Attacking the problem on only one front will need extreme and probably impractical measures.”
Hewitt suggests a “triangle of compromise” which includes a combination of paying extra contributions, paying benefits later and reducing the level of benefits – all subject to existing protections for benefits already earned.
Increased life expectancy poses yet more risks for companies, Mody added.
“This should usually be good news for people but it’s not so welcome for a company standing behind hefty pension annuity commitments,” he said.
“By our estimates, a one-year increase in life expectancy could add over £10bn to FTSE100 pension plan deficits on the FRS17 basis. Adopting new “middle-ground” pension designs can help companies avoid adding to this existing burden in the future.”
Deloitte actuaries estimate the total deficit for the final salary pension plans of FTSE100 companies stands at £65bn at year-end 2004 – up £5bn from the beginning of 2004 despite increased contributions by employers.
Watson Wyatt partner Chinu Patel said companies would fare better or worse depending on their circumstances and how they use the “small amount of flexibility” in FRS17 for measuring pension liabilities.
“However, we do not expect funding levels to have improved from a year ago for those companies where the pension fund has received a substantial cash injection during the year or if their investments have significantly outperformed the stock market indices.”
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