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The Actuary The magazine of the Institute & Faculty of Actuaries

End of the DB road?

A new report by Pension Capital Strategies (PCS) adds to the growing weight of evidence that the end may be nigh for final salary pension schemes.

Analysis of the FTSE 250 as at 30 June 2009 by the Jardine Lloyd Thompson Group subsidary estimates a total deficit in their pension schemes of £12 billion - a loss of £6 billion on the position a year ago. More concerning, the PCS report shows that 27 FTSE 250 companies have disclosed pension liabilities greater than their stock market value.

Charles Cowling, managing director of PCS, commented that only 140 FTSE 250 companies have any kind of final salary pension scheme and just 92 are providing more than a handful of current employees with final salary benefits. "Of those, only 20 companies are still providing final salary benefits to a significant number of employees," he said, defined as those incurring ongoing final salary service costs of more than 5% of total payroll.

Like the larger companies in the FTSE 100, companies in the FTSE 250 have reacted to the current economic challenges by looking to reduce pension scheme costs and risks and the PCS report predicts that, within the next two to three years, the very large majority of private sector final salary pension schemes will be closed to all employees.

Antony Osborn-Barker, managing director, Investment Advisory at PCS, noted that the average scheme asset allocation to bonds had risen from 42% to 49%, but warned that the move away from equities could be a case of too little, too late.

"Unfortunately pension schemes have missed several opportunities in the last two years to crystallise an attractive funding level and the increase in deficits ought to challenge pension schemes and their advisers to find new ways to generate returns as we can no longer rely on sponsors to give up expensive capital," he said, although he expects most pension assets to remain in bonds and other risk-reducing asset strategies for the next few years as companies move towards offloading pension liabilities and winding up schemes.

The full report, The FTSE 250 and Their Pension Disclosures, can be found at www.pensionstrategies.co.uk