QE sinks FTSE 100 firms' bid to close pensions funding gap

LONDON Mon Mar 11, 2013 6:11pm GMT

The Canary Wharf financial district is seen in east London February 28, 2013. REUTERS/Stefan Wermuth

The Canary Wharf financial district is seen in east London February 28, 2013.

Credit: Reuters/Stefan Wermuth

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LONDON (Reuters) - Efforts to kick-start Britain's economy, on the brink of its third recession in four years, have stymied efforts by Britain's top 100 firms to rebuild their pension funds, according to data from JLT Pension Capital Strategies.

The firms have injected 12.7 billion pounds into their pension schemes to make up funding gaps but have only seen an improvement of 8 billion pounds in total deficits, according to the data.

Company pension liabilities, which once barely registered on a fund manager's radar, now stand at 50 billion pounds, up from 55 billion pounds in June 2012 and 42 billion pounds a year ago, the consultancy said in a quarterly report.

Pension scheme funding levels are determined by factors such as equity market returns and yields on gilts and growth, but Britain's volatile economic climate is further complicating the ability of company pension funds to keep pace with rising life expectancy.

Britain's top company retirement schemes moved into bonds to cope with increased economic volatility but repeated rounds of quantitative easing by the Bank of England, designed to support growth have, in the meantime, contributed to a sharp drop in yields.

That means company pension schemes need even more bonds to fund a given liability.

"Aviva is the latest company to report a big switch, with bond allocations increasing by 17 percent," JLT said in the report.

Five of the FTSE 100 companies have pension commitments greater than their total equity market value, JLT said. That could affect their financial performance, by affecting their ability to make profits and investments.

International Airlines Group's total disclosed liabilities are almost five times its equity market value, while those of BAE Systems and BT are more than double, the consultancy said.

FINAL SALARY SCHEMES

BT injected an extra 2 billion pounds into its pension scheme in 2011 to tackle a 1.9 billion pound pension deficit.

"One of our biggest responsibilities is to our pension fund," Sir Michael Rake, BT's chairman said in the company's annual statement in May 2012.

BT closed its final salary pension in April 2001, and currently has about 300,000 members in the scheme.

"We were able to make a lump sum payment of £2bn into the fund, giving greater certainty to our pensioners and helping to reduce the size of future deficit payments we would otherwise have to make," he said.

Several companies have closed their final salary linked pension schemes to future accrual or are freezing pensionable salaries, JLT said.

"Attempts by many companies to stem the growth of their pension liabilities by closing defined benefit (DB) pension schemes to new entrants have had little impact," JLT said.

GlaxoSmithKline, an FTSE 100 company with 14.3 billion pounds in pension scheme liabilities and a third of its UK workforce in a DB pension plan, has capped it's employee's contributions to their final salary schemes.

This means pension contributions cannot rise in line with pay rises, if those pay rises are more than 2 percent a year.

"(These) changes are necessary in order to give us the best chance of maintaining the pension plans into the future," a GSK spokeswoman said.

(Reporting by Sarah Mortimer; Editing by Jon Boyle)

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