UK - ITV is consulting over changes to its scheme - including capping the growth of pensionable salary - in a bid to reduce its pension scheme deficit of £538m (US$905.4m).
The television company's preliminary results - released today - revealed the deficit on the firm's defined benefit schemes was £538m at the end of June compared to £178m at the end of 2008.
ITV said the increase reflected a decline in the value of scheme assets and the impact on liabilities of a higher inflation assumption, partly offset by £30m of regular deficit funding.
The increase in the firm's deficit comes just months after it unveiled its results for the year ended December 31 - and said its pension deficit had increased from £112m at the end of 2007 to £178m at the end of last year following a "significant mortality adjustment" (Global Pensions; March 4, 2009).
ITV said it was now consulting over changes to the scheme -including capping the growth of pensionable salary.
It estimated that, had such proposals been confirmed at the half year, the deficit would have been £75m-£100m lower than the reported level.
Punter Southall said ITV's half year results demonstrated the problems that a company incurs when its pension scheme is greater than the market capitalization of the company. ITV's pension scheme is worth around £2.5bn and its market capitalisation is around £1.6bn.
Punter Southall principal Richard Jones said: "Despite management pumping in £31m of ITV's precious cash into the scheme over the past six months in an attempt to plug the funding gap the shortfall in the scheme ballooned from £178m as at December 31, 2008 to £538m as at June 30, 2009."
He said this was equivalent to around eight times the earnings before interest, tax, depreciation and amortization (EBITDA) that ITV earned over the six month period.
Jones added: "The key driver of the increased deficit was rising long term inflation expectations in financial markets. Rising inflation expectations increases the expected amount of benefits that the scheme will pay to members in the future and is a cost borne by the company. Inflation expectations rose from 3% to 3 ½% per annum over the past six months. Given that the ITV pension scheme has a duration of 15 years such a change could have increased the cost of the benefits payable by up to 7.5%.
"The other factor that ITV cite for the worsening funding position is that the assets in the scheme have underperformed expectations. ITV have taken a substantial portion of the risk out of their scheme by investing around 60% of the money in lower risk bond assets.
"However around 35% of the assets are invested in equities and property assets. Equities were broadly flat over the six months and commercial property continued to fall with the impact that the overall asset portfolio failed to generate the investment returns required to pay off the benefits without the deficit increasing each year (circa 6 - 6.5% per annum)."
However, Jones warned the deficit could worsen as credit spreads - used to calculate the funding position for accounting purposes - are still at relatively high levels compared to historic data.
Should spreads normalise, then scheme liabilities will increase.
Jones said: "The big challenge for ITV will arise if the funding position does not improve by 1st January 2010 or 1st January 2011 when the next triennial valuations of the various sections of the ITV scheme are due.
"These will set contributions that ITV will have to pay into the scheme for the following three years and, if the deficit persists at the current high level, cash contributions will have to increase dramatically."
He added: "ITV seem to be managing their scheme pro-actively, as witnessed by the revelations earlier in the week of a project to offer ITV pensioners alternative pension benefits, but with the pension scheme deficit so large the only ways that the deficit is going to be seriously reduced is through additional cash contributions from ITV or excess performance on the equity and property assets.
"All other things being equal a return of equity indices to their highs in 1999/2000 would eliminate the majority of the deficit in the scheme so all is not lost but it is likely that ITV will have to continue paying substantial sums into its pension scheme for the foreseeable future."
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