A decade on from the financial crisis, the deficit as a proportion of profits has risen steeply, particularly in the last five years, a new study from actuarial firm Barnett Waddingham confirmed.
Another study by investment consultancy LCP stipulated that the pension scheme deficit for the UK’s largest 100 companies has ballooned by £29bn over the last decade.
In 2016, the deficit rose by £12bn to £62bn, equating to 70% of the £88.9bn in total pre-tax profits for the year. A year on from the financial crisis, the deficit was only 60% of pre-tax profits.
And back in 2011, the combined pension deficit of the FTSE 350 constituents sat at £54.5bn, a mere 25% of the £214bn pre-tax profits recorded by the firms that year.
Furthermore, the actuary calculated that if profits remained steady for the next three years, it would only take a 0.7% fall in bond yields for the deficit to actually exceed annual UK plc profits by 2019.
Although Barnett Waddingham partner Nick Griggs admits that “comparing the pension deficit to profits is a simplification”, it also “helps to put the scale of the challenge into context”.
“Unless companies are profitable over the long term, they can’t generate enough cash to meet their liabilities,” he said.
Despite the strong performance from equity markets toward the backend of 2016, the FTSE 350 combined deficit increased as a proportion of market capitalisation. Twenty-one members of the index have a deficit that exceeds 10% of their market value.
But Griggs noted that changes in life expectancy trends and a continuation of strong equity returns could prevent the deficit from blowing up into a bigger problem.
“If equity returns continue at the levels seen in the last few years, long-term interest rates rise more than expected and longevity increases do not provide any nasty surprises, the pension deficit problem could solve itself.
“We must remember that the deficit is essentially the difference between two much bigger numbers and a few gentle economic triggers could completely change the picture. This is why many companies are not rushing to clear deficits quickly with additional cash contributions.”
