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The Actuary The magazine of the Institute & Faculty of Actuaries

FTSE 350 companies move to improve support for pension schemes

Across the Index, companies have seen the ratio of pension scheme deficits to market capitalisation and earnings improve markedly. However, despite these improvements, the majority of FTSE 350 companies continue to hold significant risks in the form of un-hedged pension scheme liabilities. These risks are unlikely to yield upside for shareholders as companies are not typically able to access any pension scheme surpluses but remain fully exposed to the effect of scheme deficits.

Commenting on the findings, head of corporate consulting at Hymans Robertson, Clive Fortes, said: "The effect of un-hedged risks in company pension schemes has been demonstrated time and again in recent years, and especially so in the current turbulent climate. Despite this, many listed companies are still running significant un-hedged liabilities in their schemes. This approach offers little potential upside for shareholders versus the financial risks that it entails companies to hold.

"We believe that companies have to devote significantly more senior time and resource to managing the risks their pension scheme presents. A good risk management strategy will create shareholder value and increase the chances of being able to pay members' benefits by actively managing these risks.

"Inevitably, opportunities will arise in future to de-risk pension schemes at affordable prices and we would expect companies to take advantage when this occurs. Organisations that properly investigate their risks now will be better placed to capture those opportunities. Establishing good governance frameworks, triggers and budgets should therefore be a priority."

While the picture for the FTSE 350 as a whole has improved, there are substantial differences between the health of schemes in different industries. In the financial sector, only 7% of companies have a scheme deficit exceeding 10p in the pound of market cap. However the industrial sector remains hamstrung by large legacy pension deficits. This sector spent an average of 28 days company earnings on their schemes in 2010 compared to 19 days for the Index as a whole.

Mr Fortes continued: "The ability of companies to support their pension schemes in relation to their performance is far more important than considering the scheme in isolation. In this regard, companies are on the whole better placed than they were two years ago to support their schemes, in part because of increased earnings and improved market caps.

"However, the industrial sector continues to be dogged by large legacy pension deficits. This is evident in the larger contributions being made as a percentage of annual earnings. It also poses a larger risk for these companies, with liabilities on average equivalent to a higher percentage of market cap. For companies whose pension scheme is a very significant burden there needs to be a frank discussion about how best to fund them in future. Taking on additional, un-hedged investment risk may not be the best way to ensure members' benefits are paid, and will pose yet more risk for shareholders in the process."