Martin Flanagan: Dangerous pension deficits still ticking away

Published on Monday 8 March 2010 20:24

THOSE who thought the corporate pensions timebomb might just have been quietly, incrementally getting better may be disabused by a quite pessimistic new survey out today. A key finding is that notwithstanding the best investment returns in four years, the aggregate pension deficit of the FTSE 350 moved from a "headline" £16 billion surplus to a £142bn deficit last year.

The survey from Hymans Robertson, the consulting and actuarial experts, makes clear this is not so alarming as it first sounds as the deterioration is mainly due to lower credit spreads increasing pension liabilities.

Excluding the effect of changes in credit spreads, "normalised" pension deficits have remained broadly the same in 2009, moving from a 163bn deficit at the start of last year to a 177bn deficit at the end. But the figures are still big enough to concentrate corporate minds.

While pension schemes are manageable for most companies, argues Hymans, there are definite areas of concern.

The survey estimates that for the FTSE 350 as a whole, 400bn of shareholder value is at risk from unhedged pension liabilities.

For instance, Royal Bank of Scotland's unhedged pension liabilities are 53 per cent bigger than its admittedly bombed-out market capitalisation.

However, it is the industrial sector that is most blighted with large legacy pension liabilities. "It would take the average industrial company 16 months of earnings to pay off its pension deficit, which puts them at a competitive disadvantage in the global marketplace," the survey says.

With all the forces for conservative change in the pensions arena – final salary closures to new members and, increasingly, existing members, etc – it appears many companies are still spending pretty low amounts of corporate earnings on pensions and running significant unhedged pension liabilities.

Although the majority of companies can manage their pension schemes, a fact that remains the case, there is room for major upsets in certain corporate pockets.

It is worrying that half of the FTSE 350 leave the equivalent of a fifth of their market capitalisation exposed through unhedged liabilities in pension funds.

Five companies in the index are struggling under a pension deficit that actually outstrips their stock market value.

One of the main hopes would seem to be that if economic recovery gathers momentum companies will have more earnings to shore up their funding positions.

It is not quite clutching at straws, but still a pretty thin reason for optimism given the highly fragile nature of our current economic recovery.

The pensions problem remains significantly with us.

Stagecoach numbers show light at end of the tunnel

IT'S early days as far at the rail recovery at Stagecoach is concerned, but at least the revenues are moving in the right direction now.

Shrugging off the bad weather in December and January, the company's rail division revenues rose 2.1 per cent in the 40 weeks to 7 February. That compared with 1.9 per cent in the six months to October.

Stagecoach's main franchise is South West Trains out of London Waterloo, and the better performance may be an unofficial indicator that things are looking better in the City.

The line into London is Britain's biggest commuter franchise, used by a lot of City workers, and the figures suggest the worst of the unemployment following the financial implosion may be past.

The nascent rail recovery looks wider-based than that, however, even if the growth figures Stagecoach unveiled yesterday were up against soft recessionary comparatives.

Virgin Rail, the joint venture with Sir Richard Branson in which Brian Souter's group has a 49 per cent stake, boosted west coast mainline revenues 8.8 per cent in the latest period.

Stagecoach's bus division, meanwhile, proved a little less resilient to the latest cold snap. Revenues in the division rose 3.4 per cent in the 40 weeks to 7 February, down from a rise of 4.4 per cent in the first six months of the group's trading year.

There's nothing dramatically exciting about the Stagecoach performance, but it is still welcome that the group is reflecting the slight improvement in economic conditions and bodes well if the recovery gains greater traction.