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UK companies face increasing pensions deficit burden

Yesterday British Airways announced it might close its main defined-benefit (DB) pension scheme – at a time when UK companies face an increase in total pensions deficit. This BBC news report said the airline's proposal is meant to tackle its “significant and growing funding deficit” and if the move goes ahead, employees will no longer be able to make further payments into its NARP pension scheme, which currently has about 17,000 members. In March 2017, BA's pension scheme deficit stood at £3.7 billion – making it “the largest of all UK company pension deficits relative to the company's overall financial value”, according to the company.

Huge pensions deficit

This news comes just as a report by Barnett Waddingham, an actuarial firm, highlights the growing pensions deficit for the UK's biggest corporates. Last year, the total pensions deficit for companies in the FTSE350 increased from £50 billion to £62 billion. The report says 2016 was a “particularly volatile” year for DB pension schemes run by the UK's biggest companies.

The report also found an increase in benefit payments from FTSE350 companies of around 15 per cent last year, which it attributes to an increase in transfer value payments to defined contribution (DC) schemes.

Sterling tumbles and longevity stalls

However, there were some positive indicators too. After the EU referendum in June 2016, the value of sterling tumbled, significantly reducing the deficit contributions as a proportion of free cash flow – from 9 per cent in 2015 to 5 per cent in 2016, according to the study. Barnett Waddingham concluded that a number of companies with overseas operations benefitted from the post-referendum fall in the value of sterling.

And on a more macabre note, the report found that mortality in the UK had eased off over the past five years. The plateau in the trend towards living longer could provide some welcome respite for companies from a DB pension scheme funding perspective, said the report. It stated: “Data confirming this was only released in the last few months, but if this trend had been recognised in the 2016 financial statements of the FTSE350 companies, this would have reduced the aggregate deficit by around £10bn.”

Flight from defined-benefit

In any case, the report by Barnett Waddingham shows BA is not alone in taking steps to end its DB pension scheme. It found that 150 of the companies in its study were still offering a DB pension to current employees in 2016 – but it adds: “the closure of these schemes continues apace, with some high-profile companies terminating DB pension accrual over the year”.

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