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The Actuary The magazine of the Institute & Faculty of Actuaries

UK employers paying the price on DB scheme deficits

Twenty nine companies in the FTSE350 have defined benefit (DB) deficit contributions that exceed free cashflow, according to research conducted by Barnett Waddingham.

The key findings include:

· The deficit contributions exceeded free cashflow for 29 companies in the FTSE350

· For over 70 companies the annual DB deficit contributions are higher than the contributions being paid to pay for pension benefits being earned each year for current employees

· For the majority of companies the DB scheme deficit is a manageable annoyance.  However, for over 10 companies the deficit exceeds 20% of the market capitalisation of the company, and for 39 companies it exceeds 20% of the equity value (after removing the pension scheme liability)

· For a significant number of companies the DB scheme deficit is having a significant impact on the gearing ratio (a measure used to asses financial risk) which could ultimately impact on a company’s ability to raise finance. On average the impact was to worsen the gearing ratio by 3.4%, however, for 16 companies it was more than 10%

· Over 25 companies had pension liabilities that exceed the market capitalisation of the company

· 14 companies had an equity holding in their scheme that was more than 50% of the market capitalisation of the company.

Nick Griggs, head of corporate consulting at Barnett Waddingham, said: “The research shows the pension generational divide that exists as many of the UK’s largest employers are now paying more to plug defined benefit scheme deficits than they are to fund the benefits earned by current employees each year.

“Our research shows the widespread impact defined benefit schemes are having on the businesses of some of the UK’s largest companies. Deficit contributions can place strain on companies when significant risks materialise.”