• Half of the FTSE 350 leave 20% of their market cap exposed through un-hedged liabilities in pension schemes
• Five companies in the FTSE 350 have a pension deficit* in excess of their market capitalisation
• It would take eight companies in the FTSE 350 more than five years’ of earnings to pay off their pension deficit*
• Most FTSE 350 companies remain well equipped to deal with their pension liabilities, but this hides significant sector differences
• With the exception of many of the high street banks, the financial sector is very well placed to manage its pension risks
• In contrast, Britain’s industrial sector is burdened with large legacy pension liabilities that puts them at a competitive disadvantage in the global market place
• In spite of the best investment returns for four years the aggregate pension deficit of the FTSE 350 (as measured by IAS19) moved from a £16bn surplus to a £142bn deficit due to a reduction in credit spreads
• This will lead to a disclosure of increased IAS19 pension deficits during this reporting season
• Hymans Robertson expects pension spending to increase in 2010 as the deterioration in funding positions in 2008 and 2009 feeds through into recovery plans

Research released today from Hymans Robertson, the UK’s leading independent experts in benefits and investment, has found that significant risks remain un-hedged in the pension schemes of FTSE 350 companies, even in those where the pension scheme is not a significant burden for the sponsoring company. From a shareholder perspective, many of these risks are unrewarded.

Looking at the FTSE 350 as a whole, most companies remain well equipped to deal with their pension liabilities with half of the companies in the index having a pension deficit* of less than 6p in the pound of market capitalisation.

However, this hides significant sector differences. Overall the financial sector, with the exception of some of the high street banks, is well placed to manage its pension risks and the typical financial services company could pay off its pension deficit* with three months of earnings. In contrast, Britain’s industrial sector is burdened with large legacy pension liabilities. It would take the average industrial company 16 months of earnings to pay off its pension deficit which puts them at a competitive disadvantage in the global market place.

Clive Fortes, Head of Corporate Consulting at Hymans Robertson, comments:

“The past few years, indeed the past few decades, have highlighted the damaging effects that un-hedged risks in a pension scheme can have on companies. Inevitably opportunities will arise in future to de-risk pension schemes at affordable prices. We expect that many companies will wish to capture these opportunities and should prepare now by establishing governance frameworks, triggers and budgets to enable them to do so.”

In spite of the best investment returns for four years, the aggregate pension deficit of the FTSE 350 (as measured by IAS19) moved from a £16bn surplus to a £142bn deficit, primarily due to lower credit spreads increasing pension liabilities.  Stripping out the effect of changes in credit spreads, however, normalised pension deficits* have remained broadly stable in 2009, moving from £163bn deficit at the start of 2009 to a £177bn deficit at the end of the year.

Clive Fortes added:

“Whilst normalised pension deficits are not significantly worse, disclosed IAS19 pension deficits are going to be much higher this reporting season. This will inevitably lead to increased corporate awareness of pension schemes in 2010.

“Pension schemes are actually manageable for the majority of companies, and shareholder value could be improved by taking action to control pension risk. Many companies are still spending relatively low levels of corporate earnings on pensions and running significant un-hedged pension liabilities.

“Where companies do not currently do so, we would encourage them to divert more management time and resources to investigating and understanding pension risk. This will ensure that a demonstrable plan is in place to deal with pensions risk and enable companies to take advantage of market opportunities as they arise.”

To view our full Pensions deficit analysis 2010 report click here

*pension deficit definition: aside from the quoted IAS19 pension deficits, all other pension deficits referenced have been normalised by valuing the pension liabilities using a discount rate with a fixed spread over government bond yields of 0.85% per annum