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Tags: Pension | Deficits | Britain | US

Pension Deficits Deepen in Corporate Britain, US

Tuesday, 10 July 2012 11:45 AM EDT

Chronically weak stock markets and record low bond yields have pushed company pension deficits in the United States and Britain sharply higher, adding to the burden of retirees living longer than ever before, reports said on Tuesday.

In the United States the aggregate deficit of S&P 500 companies grew $59 billion in the first half of the year to $543 billion, consultancy Mercer said.

Corporate America is sitting on total liabilities of $2.09 trillion against total assets of $1.55 trillion, Mercer added.

The picture is no less bleak in Britain, where the combined deficit of FTSE 100 companies more than doubled over the past year to 41 billion pounds ($64 billion), actuarial firm Lane, Clark & Peacock (LCP) said in a separate report.

This is despite companies having poured 11 billion pounds ($17 billion) into schemes over the last year in an attempt to plug the deficit, LCP said.

Total liabilities of blue chip British companies stand at 447 billion pounds against total assets of 406 billion pounds, LCP's analysis of 83 of the FTSE 100 companies showed.

The demands on company pensions have been increasing because people are living longer, meaning institutions are obliged to pay out to workers for longer after they retire.

At the same time, the returns the pension funds make on investments are shrinking because of volatile financial markets and historically low bond yields, used to assess liabilities, which are calculated using benchmark yields such as those on top-rated corporate bonds.

Low yields lead to bigger liabilities, hence more deficits, because pension funds will need more assets to pay sufficient income to pensioners in the future and companies may need to pay more into the pot.

"Deficits have fluctuated by as much as 10 billion pounds in a single day as uncertainty continues to characterize both equity and debt markets," said Bob Scott, partner at LCP and author of the firm's report.

Uncertainty over returns has also prompted a shift out of riskier assets such as equities to those seen as safe havens, such as government bonds, which has resulted in more downward pressure on yields.

Only 35 percent of pension scheme assets in Britain were being held in equities at the end of 2011, compared with 43 percent in 2011 and nearly 70 percent 10 years ago, the report said.

These pressures not only impact the ability of a company to invest in the economy and attract capital, but can also push shareholders to the back of the queue in terms of how a firm's cash is shared out.

© 2023 Thomson/Reuters. All rights reserved.

Tuesday, 10 July 2012 11:45 AM
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