Stock investors are implicitly adding 20% to defined benefit (DB) liabilities when analysing FTSE 100 companies, a study has shown.

The report, by Llewellyn Consulting and sponsored by Pension Insurance Corporation (PIC), also found that FTSE 100 companies with the largest DB liabilities were most penalised by market investors.

The research said investors picking stocks gave as much attention to the net-asset position of DB schemes as they did to the sponsor’s business operations.

It also found that while deficits were of concern, more focus was placed on long-term pension liabilities.

Llewellyn Consulting said net deficit positions at FTSE 100 companies averaged 4.7% of market capitalisation, while long-term pension liabilities were 47.5%.

However, investors showed no confidence in the value of the liabilities and therefore inflated the figure by 20% to achieve what they believed to be a more accurate picture.

John Llewellyn, of the eponymous consultancy, said it was “striking” that markets did not reflect the numbers presented by FTSE 100 companies.

David Collinson, head of strategy at PIC, added: “Analysts and finance directors can struggle to put accurate figures on the shareholder value impact of the risks associated with a company’s DB pension scheme.

“For the first time in the UK, they can now see an estimate of the weight investors put on the scale of risk,” he said.

In other news, BNY Mellon has teamed up with consultancy Redington to provide UK pension funds with a reporting service for their liability-driven investment (LDI) portfolios.

The bank and consultancy said the service should allow pension funds to track and monitor risk exposure and funding positions on a quarterly basis, which they said would help trustees understand how to meet liability requirements.

It will also model the impact of changing economic circumstances on pension scheme funding levels.

The service will be backed by Redington’s iRIS risk reporting tool, which will increase its usability by adding BNY Mellon’s data on derivatives used in LDI transactions.

Lastly, the Agility Pension Plan has appointed Barnett Waddingham to monitor its fiduciary management contract with an unnamed provider.

Alex Pocock, partner at the consultancy, noted the potential for conflicts of interests within the fiduciary management model and said he looked forward to working with the scheme’s board of trustees.

Kim Nash, trustee at the £100m scheme, added that they were impressed by the pragmatic approach suggested by Barnett Waddingham.

Appointing an outside consultant to monitor the performance of fiduciary mandates is not uncommon in the UK, with Hymans Robertson appointed to oversee Towers Watson on behalf of the Merchant Navy Officers’ Pension Fund in 2012.

Topics