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The Actuary The magazine of the Institute & Faculty of Actuaries

European companies will clear UK pension deficits a year before FTSE350 firms

Companies head-quartered in Europe with UK final salary pension schemes are paying over two times more per employee each year towards deficits than their British counterparts, according to Barnett Waddingham.

UK DB pension funds increased by almost £100bn over 2016 ©iStock
UK DB pension funds increased by almost £100bn over 2016 ©iStock

Their research shows that European companies are paying £5,700 per employee annually towards deficits, and if these trends continue, will clear their deficits in around six years, almost a year before FTSE350 companies who pay £2,400.

In addition, the cost of final salary schemes as a proportion of total staff costs is 14.9% for companies based in Europe, more than double the 6% for British organisations.

Barnett Waddingham partner, Andrew Vaughan, said: “The figures raise an interesting question as to why European companies with UK final salary pensions are paying proportionately more than their UK counterparts to fund deficits?

“One possible explanation is that European-headquartered companies have tended to adopt a more cautious approach globally to managing their pension obligations. It will be interesting to see how this pans out post-Brexit.”

“Many of the constituents in our research are clearly comfortable funding UK pensions at a quicker rate, as it allows them to de-risk at a faster pace and means they should be free from the deficit burden sooner.”

The findings also show that while European firms have an average funding level 2% higher than FTSE350 companies, 40% have a scheme in surplus compared with only 29% of British firms.

This comes after previous research from the actuarial consultants showed that over a quarter of FTSE350 companies with DB schemes are relying on external sources of finance, or drawing on cash reserves to plug their deficits.

With the collective deficit of UK DB pension funds increasing by almost £100bn over 2016, and the cash generated from day to day business activity for FTSE350 companies declining in the previous year, there are concerns about how much these firms can further increase investment and contributions to pension deficits.

Barnett Waddingham head of corporate consulting, Nick Griggs, said: “The increasing size of these deficits is well known, but our research shows how this comes at a time when deficit contributions were already placing a considerable strain on companies and their ability to invest for sustainable future growth.

“Going forward this really challenges the extent to which companies can afford to further increase deficit contributions given the other challenges they face – something they will undoubtedly be pushed to do in the near future.”