It has been reported that the total pension deficit at the UK’s largest companies has more than doubled over the last year, caused primarily by volatile markets and falling bond yields. The analysis carried out by actuarial consultants Lane, Clark & Peacock (LCP) reveals that the combined deficit of 83 FTSE 100 companies rose from £19 billion to £41 billion in the last twelve months. This comes after the same companies had put an excess of £20 billion into their pension funds to try to get the deficit under control.
This is a staggering amount and even more shocking when you realise that auto-enrolment is about to kick off later this year for larger companies, driving the pension liabilities of these companies even higher. It makes you wonder how much longer we can keep loading responsibility for pensions onto employers. The liabilities are excessive and the benefits to the shareholders are minimal for the corresponding liability that is applied to their balance sheet.
Of course it is argued that generous pension provisions are necessary in order to attract and retain the best staff but the corollary is that good pension provision is actually ensuring that staff who are burnt out or in need of a new challenge are staying in companies because they are members of gold-plated defined benefit schemes, which they would never be able to get elsewhere.
Money is never a good motivator for staff and some employees are now feeling that their pension scheme is more of a golden handcuff; preventing them from moving to other companies to hone their skills and broaden their experience. Indeed, after strenuously arguing against the rigidities of the labour market regulations that the European Commission have been trying to foist on the UK, we are now in danger of letting the appeal of the closed pension funds do the exact same thing by preventing the movement of middle management between companies and between the public and private sectors. This stifling of the healthy cross-fertilisation of corporate cultures by the movement of middle management will not help the UK’s business sector perform at the competitive level that it needs to.
The other thing it makes you wonder is how much longer shareholders will put up with this? LCP are reported in the Financial Times as stating that 10 of the companies, including BAE Systems, Barclays, and Marks & Spencer, have paid more into their pension funds for deficit reduction than they paid out in dividends. Directors will find it increasingly difficult to justify this to their shareholders in terms of the benefit the company actually receives from it.
Employers cannot cope with the burden of existing pension commitments. The need to reduce pension deficits is taking capital that should be used for investment and the creation of new jobs. Governments need to help by looking for ways to reduce this burden on industry. If we don’t find a way to relieve companies of this burden, we can hardly be surprised if our businesses stagnate in the face of competition from businesses from developing countries that aren’t burdened down with this legacy, and have no intention of setting them up.
What do you think? How will employers cope with the growing pension burden? Let us know in the comments below!
— Jamie Macgregor (@JamieMacgregorC) July 13, 2012