Despite the recent turmoil in global markets, the total surplus in the pension schemes of the FTSE 100 companies has now increased to £22 billion.

Pension schemes invest a significant proportion of their funds in equities and other risky investments to grow the assets faster than their liabilities in the long term. Despite the recent turbulence in markets linked to “sub-prime” mortgages and loans, the return on the UK equity market has been around 5% since the start of the year.

David Robbins, a Pensions partner at Deloitte, comments: “The majority of pension schemes have little direct exposure to sub-prime loans and mortgages. The growth of scheme assets has been indirectly affected as pension schemes hold shares in banks and financial institutions, and most pension funds will have exposure to broader credit markets through their holdings in non-government bonds and any holding in cash. The latter is likely to be of more relevance to those funds with swap structures in place to hedge interest rate risk. But as the largest losses have been made in the financial sector, a well diversified portfolio of shares typically held by a pension scheme will have performed better”.

At the same time, the measured value of company pension liabilities has actually fallen by c. £60 billion since the start of 2007. This is because the price of company bonds, which are used to measure the value of pension liabilities on company balance sheets, has fallen due to the continued uncertainty over the ability of borrowers to repay their borrowing. Therefore, pension surpluses have improved.

However, although the balance sheet position of pension schemes has improved when liabilities are measured against the value of high quality corporate bonds as required by company accounting standards, surpluses may not be of genuine economic value to the company.

• Many companies that have now closed their pension schemes may find it increasingly difficult to benefit from a surplus. If there are only a few active employees left in the scheme, there is a limit to which future contributions can be reduced and it is near impossible for the employer to take a refund from a pension scheme.
• Companies may not be able to reduce cash contributions despite the improvement in surpluses. Contributions are often calculated by measuring pension liabilities relative to the price of government bonds rather than corporate bonds. If liabilities are assessed relative to the price of government bonds, funding levels are only slightly better than at the start of the year. 

Mr Robbins adds “For some company pension funds, it will be worth now considering whether to protect the improved funding position by investing in assets which will move in line with the scheme liabilities. Running up a big surplus is not in the company’s interest but keeping a small surplus is.”

For further information on supporting graphs, please download our press release Pension schemes gain despite market turmoil. (PDF, 223KB) 

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.

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. 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 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.