The truth about pension deficits

The truth about pension deficits
30 January 2013

AS STOCK markets started to recover last year it was assumed that pension deficits would have reduced. Wrong! cashy contributor and Wealth Manager for Globaleye Mark Thorpe takes a look at how pension deficits have grown despite financial recovery…

At the start of 2013 and with our New Year resolutions fresh in our minds, I thought it would be a good idea to look at how defined benefit pension schemes (final salary schemes to you and I) have fared in the past year, bearing in mind that many were and still are in deficit.

You are probably aware that stock markets started to recover somewhat last year. You would, therefore, assume that these pension deficits would have reduced too – far from it, unfortunately.

Demands exceeding deficit

In an article published by JLT Pension Capital Strategies on 2nd January 2013, the United Kingdom deficit widened from £110 billion at the end of November 2012 to £118 billion at the end of December 2012. Overall, however, this was a slight improvement from December 2011 which then stood at an estimated £120 billion.

Charles Cowling, the Managing Director of JLT Pension Capital Strategies, at the time, said: “The accounting rules dictate assumptions – based on high quality corporate bonds – for calculating pension liabilities which are far less onerous on companies than assumptions used by pension scheme trustees and encouraged by The Pensions Regulator.”

“This means that cash demands from trustees are likely to far exceed the deficit funding which the accounting figures will suggest,” he explained.

The bigger picture

In the USA, the picture was even gloomier. In a report published by Mercer on 3rd January 2013, the aggregate deficit in pension plans sponsored by S&P 1500 companies had increased by $73 billion to a record year-end high of $557 billion as of 31st December 2012.

In Europe, according to an article published by Investment Europe on 13th August 2012, German companies carried the highest pension deficit ratios in Europe, according to analysis by Morgan Stanley. They reported that 60 of the top companies had pension liabilities of over 15% of their market capitalisation. Salzgitter, for example, had a $2.45 billion pension liability and a market capitalisation of $2.28 billion.

France didn’t escape this either. Morgan Stanley reported that Alcatel Lucent has a pension liability of 139% of its market capitalisation and the Netherland’s Delta Lloyd 120.9%. Surprisingly, companies in the troubled Euro states do not have the same problems. Greece has just one (OTE Hellenic Telecom, only 30.1%), Ireland also just one (Smurfit Kappa Group, 46.9%). In Portugal just one (EDP Energias de Portugal (18.4%) and Spain contributed just two; Bankia (28.9%) and Banco Santander (27.3%).

Yet none of these can beat the UK’s Thomas Cook Group whose deficit is a whopping 218% of its market capitalisation.

I would recommend any client with an old final salary schemes anywhere in the world, to sit down with his or her financial adviser and review it as part of their New Year’s resolution!

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  • tamirahamam

    An interesting read Mark - would love to hear your thoughts on the new NBAD Wealth Builder Plan being introduced, as detailed here by the Khaleej Times and featured here on cashy!

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