UK - Recent figures estimating the current pension deficit of the FTSE350 pension schemes should not be taken at "face value", Hymans Robertson has warned.
A number of consulting firms issued figures at the end of September highlighting the impact of the current financial turbulence on the defined benefit (DB) pension schemes belonging to companies in the FTSE350 and FTSE100 indeces, however the figures differed dramatically between sources. (See earlier IPE article: Pensions see surplus gains, but then again...)
Hymans Robertson has warned despite reports of "multi-billion pound accounting deficits and surpluses", it said in "times of severe financial crisis, it would be unwise to take these accounting numbers at face value".
Chris Hurry, partner and actuary at Hymans Robertson, pointed out for accounting purposes, pension liabilities are measured using a method that "actually reduces the apparent value of liabilities the more wary the market is of the financial institutions that issue AA-rated bonds".
The consulting firm claimed the effect of Lehman Brothers insolvency in September was to "reduce the value placed on all companies' pension scheme liabilities", even though it may seem "counterintuitive".
Hurry warned by "stripping out the hopefully temporary impact of the financial crisis on AA corporate bond prices, recent reports highlighting accounting surpluses understate the pension liabilities by as much as £160bn (€203bn) across the whole FTSE350".
Hymans Robertson suggested even putting aside the increased fear of default from the financial sector, the "aggregate pension position of the FTSE350 companies was a deficit of some £145bn at the end of last week".
Clive Fortes, head of corporate consulting at Hymans Robertson, warned shareholders they "should be under no illusion that the pension figures reported in company accounts aren't as manageable as they might seem".
"The financial crisis, the near 40% fall in equity values over the past year and rising inflation expectations, will have severely damaged the finances of UK pension schemes," he warned.
"While trustees might not immediately re-assess the level of contributions needed to restore their funding positions, additional cash will eventually be needed. Now is not the time for companies to bury their heads in the sand and hope that the problem will go away. Companies need to establish a robust strategy for mitigating the risks within its pension scheme over time," added Fortes.
The ongoing debate about what discount method should be used in calculating pension liabilities follows proposals from the UK Accounting Standards Board (ASB) in January to switch from the AA corporate bond yield to a 'risk-free' discount rate.
However, this proposal has come under criticism from most of the pensions industry over fears that switching the discount rate will increase pension liabilities substantially and possibly contribute to a decline in DB schemes, leading the ASB to admit it may have to rethink the proposal. (See earlier IPE article: ASB to reconsider risk-free discount-rate)
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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