Connected Research

Union policy research in the 21st century

Pension schemes accounting deficit rises to £300bn

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Consulting firm Deloitte reported yesterday that FTSE100 pension schemes have a combined deficit of more than £300bn. This is the highest level recorded by the company and represents a substantisal deterioration on the £130bn deficit recorded at the start of the year.

This is around 50% higher than the aggregate deficit reported this month by the Pension Protection Fund’s monthly update of its PPF7800 Index and for the simple reason that the approaches to the statistical data are quite different: the PPF7800 looks at the balance of assets and liabilities in pension schemes; Deloitte is doing so similarly but though the peculiar prism of how sponsoring companies must account for this balance in their annual accounts. So, the former represents the view of an actuary; the latter the view of an accountant.

Both are specialists in the dark arts – but, whereas the view of the actuary is probably a little closer to the truth, it is accountants who run the companies who sponsor pension schemes. So, the Deloitte report will be influential.

As is well publicised, most companies have already taken action as regards the deficits in their schemes, including opening new defined contribution schemes and closing defined benefit ones either to new members or, more drastically, to future accrual for existing ones (though closure won’t wipe out the deficits). Some schemes have also made benefit cuts as an alternative to closure of the one type or the other.

What Deloitte is saying is that this level of deficit is so great that it would command additional cash contributions of an order which is ‘unsustainable’, ‘unaffordable’ and a dozen other words beginning with ‘un’, and that there is therefore a need to think of other ways of conveying value to pension schemes. Somewhat coyly, it says that there are ‘some interesting and innovative ways to do this.’

What matters in terms of pension scheme valuation is not the accounting standards-based deficit but the one as measured by the actuary and so the question being raised is somewhat false – since it is likely that companies won’t be having to find this level of cash to restore schemes to health – but, at the same time, companies are already evidently having difficulties meeting the cash contributions that the valuations are showing. The BT pension scheme is one scheme in which the order of the valuation is currently causing intense discussions.

So, what ‘interesting and innovative’ ways of meeting shortfalls is Deloitte proposing? Well, it’s coyness in the face of securing business prevents it from saying too much, but these would include the shifting from the balance sheet to the pension fund of, in addition to cash, in specie contributions such as ‘capital and assets… This can include real estate assets, the value of brands or other investment.’

In terms of securing the continuation of the employer covenant, such moves are no doubt welcome alternatives in the light of companies’ financial difficulties provided that they are indeed cash-based assets, or could be turned into such quickly if required, and that the nature of the ownership by the pension scheme is genuine. Property and investments clearly fit the definition but I am somewhat concerned by the reference to ‘value of brands’, the cash equivalent of which looks to me less than tangible were it needed to be called upon, since the circumstances in which this would occur would be that the sponsoring company was insolvent and, presumably, as such had little value in its brands…


Written by Calvin

17/07/2009 at 2:16 pm

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