Financial Strategy, Second Edition

CASE STUDY 16

Companies Still Failing to Fill the Funding Gap

Lucy Warwick-Ching

The dire state of Britain's pensions system was highlighted this week as new figures revealed that the black hole in company pension schemes is getting deeper in spite of a steady rise in equity markets.

Pension fund contributions by companies in the FTSE 100 index were at a similar level in 2004 to the previous year, at £11.4 bn. But after meeting the cost of new pension promises and interest on last year's deficit, less than £1 bn was left to reduce the £60 bn underlying deficit, according to research from RBC Capital Markets.

John Ralfe, an independent pension consultant and author of the research note, says although many companies have been increasing contributions, they have often done so after a full or partial contributions holiday. “This stops the deficit increasing but does nothing to reduce it,” he says.

The size of the companies' pension liability is particularly important when seen in relation to the assets held by that company. “Many companies have huge pension liabilities – far bigger than the assets they have to pay them,” says Donna Bradshaw, independent financial adviser at IFG Group. “This could leave thousands of workers in a parlous state if their employers suffer prolonged bad trading and go under – as has happened with MG Rover.”

Five companies – British Airways, BAE Systems, ICI, Rolls-Royce and British Telecommunications – account for 20 per cent of the overall FTSE 100 liabilities ...