UK - FTSE 100 companies have paid almost twice as much into their defined benefit pension schemes in the past year than they did in the previous 12 months, new research shows.
A study by consultants Watson Wyatt found that, on average, contributions from employers had risen by 95%. Some 75% of the FTSE 100 companies had increased pension contributions, in some cases quite significantly.
Chinu Patel, a partner at Watson Wyatt, said: Company contributions are normally set following the three-yearly actuarial valuations and not the annual accounting calculations. However, concerns about growing deficits and the increased profile of pensions in corporate affairs generally have had an impact on companies' pension funding decisions.
Patel said that this came at a time of improved pre-tax profits for many companies, which increased by 30% on average over their 2002 levels, so they could afford to, and have, paid more into their schemes.
A quarter of the aggregate increase in pre-tax profits of FTSE 100 companies in 2003 over 2002 was absorbed by increased pension contributions, although the distribution across all companies was far from even, according to Watson Wyatt.
The research, which covered the pension schemes of 40 of the 50 FTSE 100 companies that reported on December 31, 2003, also found that despite the extra contributions and the improvement in equity markets, FRS17 pension scheme deficits have hardly changed at an estimated £60bn for the FTSE 100.
Patel said: This is because pension liabilities also increased due to the reduction in bond yields during 2003, which increase the net present value of liabilities, as well as increased inflation expectations in the gilts market, which increase the expected pay-outs.” Watson Wyatt estimates that the aggregate deficit in FTSE 100 pension schemes at the end of March 2004 was also unchanged at around £60bn.
Even if companies continue to contribute at the new increased levels, it will take many years before the deficits are eliminated unless there is a dramatic improvement in the stock markets without a knock-on effect on the corporate bond market or on inflation expectations, Patel said.
Research also found that the proportion of assets invested in equities was unchanged at 60%.
According to Watson Wyatt, many pension schemes are looking to reducing their equities exposure over the long-term but have been held back due to current market conditions.
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