FTSE 100 pension schemes
13 May 2011
The latest PF Risk Report shows that the aggregate funding deficit of the FTSE 100 pension schemes continues to decline - yet schemes have done little to improve their risk position
Despite significant improvements in the deficit numbers over the previous eight months, the majority of pension schemes have failed to seize the opportunity to de-risk according to RiskFirst, the pension industry's leading provider of risk analytics and reporting software.
The latest PF Risk Report - the company's monthly analytical report on UK DB pension risk for FTSE 100 companies - highlights that over the past eight months assets held by FTSE 100 DB schemes have increased by £29 billion while liabilities have fallen by £25 billion, resulting in a net reduction in the proxy funding deficit of £54 billion. The deficit now stands at £80 billion.
However, far from good news, this could represent another lost opportunity to de-risk. The vast majority of schemes have not taken the opportunity to "lock in" improvements in funding levels by removing risk - meaning that their aggregate risk position has remained relatively constant. Indeed, the report highlights that the Value-at-Risk (VaR) for the FTSE 100 has fallen very little (from £30.54 billion to £30.19 billion) since August 2010 - a relatively small amount in comparison to deficit improvements.
"The improvement in funding levels over the previous eight months has been a huge benefit to pension schemes," says RiskFirst Analytics CEO, Benjamin Reid. "To put this figure in perspective, the improvement in the deficit outweighs the total dividends paid out by the FTSE 100 over the same period. Many pension schemes were in a similarly favourable funding position back in 2008 but failed to take the opportunity of reducing risk and subsequently slipped back into deficit when the financial crisis hit. It is worrying to think that many are leaving themselves open to this happening again."
The issue is made more pressing by the fact that many FTSE 100 schemes are beginning or are currently working on the triennial process of valuing their schemes' assets and liabilities. Given that scheme contribution requirements are pegged to the scheme's deficit figure and are only agreed once the valuation has been completed - which can often take a year or more - companies beginning their valuations are exposed to potentially serious risk. Indeed, over the year that it takes most companies to sign off their valuation, the PF Risk Report shows that the VaR figure stands at over £100 billion*. A widening in the deficit of such a magnitude would result in FTSE 100 companies having to make approximately £10 billion of increased cash contributions into their schemes each year with major P&L implications.
"Despite April 2011 looking like a fortuitous date for a triennial valuation, there is a chance that firms may see deficits more than double over the next 12 months if de-risking takes a back seat while trustees and corporates go through the onerous valuation process," adds Andrew Morris, Assistant Vice President of Client Solutions at RiskFirst. "Given that deficit swings over that period could have economic implications for schemes for the following three years, it is imperative that they do not take their eye off the ball."
*at a 1-in-20 value-at-risk confidence level