Pensions gap narrows as stocks rise

Published on Wednesday 2 December 2009 20:35

THE pension deficits at Scotland's biggest companies narrowed in the last quarter as stock-market growth boosted asset levels.

According to figures published yesterday, the total assets of the seven schemes monitored by the Hymans Robertson Scottish Pension Index grew by 1.4 billion in the three months to the end of September to 9.4bn, reflecting equities growth of 20 per cent over the period.

But their pension deficits – the difference between the assets held and the cost of providing benefits – fell by just 600 million to 2.7bn because of an increase in the cost of meeting future pension promises, as long-term interest rates fell.

The index measures each company's deficit in terms of days of earnings. As of 30 September, Stagecoach had a deficit equivalent to 657 days of its 2008 earnings, compared with 844 days of its 2007 earnings. Weir Group's position also improved significantly, requiring 221 days of earnings to cover its deficit at the end of the third quarter, down from 345 a year earlier.

Chris Hurry, a partner at Hymans Robertson in Edinburgh, said: "This shows that the position across 2009 improved for the majority and reflects that, in a number of cases, the 2008 earnings were better than those of 2007."

But he cautioned that pension deficits remain a significant potential drain on the cash resources of Scottish companies. He said: "Companies need to be sure that they have realistic plans in place to close these deficits.

"While there are some 'quick-win' solutions, that may well mean cutting back on the pensions people earn today to shore up the funding for what people have earned in the past."

But Richard Slater, a partner in the pensions tax practice at PricewaterhouseCoopers Scotland, pointed out companies are increasingly looking at alternative ways of funding their schemes.

"Most businesses want to conserve cash, so they are looking at options such as guarantees, security over assets and ways of making the business flourish in the short term," he said.

The index tracks the financial health of seven of the largest listed companies in Scotland: AG Barr, First Group, Forth Ports, Scottish & Southern Energy, Stagecoach, Standard Life and Weir Group. But it excluded Royal Bank of Scotland as the size of its assets (29bn as at 30 September) and deficit would have distorted the picture.

At 30 September, the RBS deficit would have needed 990 days of its 2008 earnings to fill. A year earlier it would have required just 280 days, based on 2007 earnings.