The total deficit for final salary pension plans of FTSE 100 companies is currently £40 billion according to actuaries at Deloitte.  The deficit has fallen by £35 billion since the beginning of the year primarily due to falling prices in bond markets used to value pension liabilities. Deloitte estimates the current value of FTSE 100 pension liabilities is £40 billion, the majority of which has been reflected on company balance sheets under new International Accounting Standards.

Over the last six months, the equity market has been particularly volatile. In mid-March, the FTSE 100 index broke through the 6000 point mark, but has since fallen back - a typical portfolio of assets held by a UK pension scheme has increased by around 3% during this half-year. However, falling bond prices are good news for company pension liabilities.  Deloitte calculates that the lower prices of bonds typically used to benchmark pension liabilities have reduced the deficit by £35billion, after offsetting the effect of higher inflation.

Please download the attached PDF to view the graphs 'Deloitte estimates of the pension deficits for the FTSE 100 companies'

Under the new International Accounting Standard for pensions, around half of the FTSE 100 companies have indicated in their latest accounts how long they expect a typical member to receive benefits when they retire. Unlike in other countries such as the US and in Europe, there are a wide range of allowances which are typically being made in the UK for current and future improvements in life expectancy when valuing pension liabilities.

• Current estimates of life expectancy used to value company pension liabilities are based on the data collected by life insurance companies on the customers who purchase their products - a specific group of individuals. Preliminary research suggests that the typical members of a company pension scheme have a lower current life expectancy than this group.  Research into the life expectancy of actual pension scheme members is yet to be finalised – this is one reason for the wide range of life expectancy assumptions currently used by companies for their own schemes.
• There appears to be a significant income effect - the larger your pension income, the longer you tend to live on average. Based on recent research into the membership of company pension schemes, Deloitte estimates that current pensioners receiving a pension of more than £13,000 p.a. can expect to live on average around 4 years longer than those currently receiving less than £4,500 p.a. 
• The uncertainty risk which companies are facing around future life expectancy is expensive to sell in the market.  There are only a small number of investors who are willing to take a gamble on the length of time they expect to make pension payments to a group of individuals. The recent entrance of new players into the “pension buy-out” market should increase the market’s capacity to take on this risk – but whether the price falls far enough to make it attractive remains to be seen.

David Robbins, consulting partner at Deloitte explains “Increasing uncertainty about future life expectancy is a key long term risk for companies operating pension schemes, but in the short term, it is the conditions in financial markets which create short term volatility in company balance sheets - and a headache for the Finance Director”.

Many FTSE 100 companies have announced in the last few months plans for accelerating the funding of their schemes to “plug deficits”. However, this strategy is unlikely to significantly reduce the volatility of pension deficits on company balance sheets unless there is a widespread change in pension fund asset allocations.

David Robbins adds “Despite market movements since the start of the year, the cost of buying assets which match pension payments such as inflation-linked bonds is still relatively expensive and the assets are hard to come by. Cost issues aside, a poorly funded scheme will have insufficient funds to purchase the volume of “matching” assets required relative to the current value of the liabilities making it difficult to stabilise the situation”.
Ends

Notes to Editors
The above analysis is based on Deloitte calculations of the FTSE 100 companies using disclosed FRS 17 and IAS 19 information on their UK and overseas pension and post retirement benefit arrangements. Life expectancy estimates are Deloitte calculations based on the contents of Working Paper 9 issued by the Continuous Mortality Investigation Bureau.

About Deloitte Total Reward and Benefits Limited
Deloitte Total Reward and Benefits Limited is a multi-disciplinary consulting group comprising 100 actuaries and other pensions and benefits specialists, which focuses on delivering high quality pensions advice to employers and scheme trustees. Deloitte Total Reward and Benefits Limited is authorised and regulated by the Financial Services Authority.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and its people excel.

Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.