The 11 biggest company pension schemes in the Midlands face a funding gap of nearly £6 billion, a new study has revealed.
The figures highlight how much funds suffered in a “torrid” 2008, said Hymans Robertson, a firm of actuaries and advisers which published the first Midlands Pension Index.
Taking the region’s top 11 listed companies by market capitalisation, the study shows they had estimated total pension assets of about £12.5 billion on December 31 last year.
But that was nearly £6 billion short of the amount they need in order to meet their long-term liabilities, according to Rob Harper, head of Hymans Robertson’s Birmingham office.
“By shortfall, we mean the difference between the expected cost of providing members with the pensions that they have been promised and the amount of money that the pension scheme has,” he said. “If the pension scheme has more money than it is expected to need then it is said to be in surplus.”
The companies studied by Hymans Robertson range from Cadbury Schweppes, with estimated scheme assets of £2.3 billion, to brewer and pub operator Marston’s, with £300 million.
The report says that, in line with all UK pension schemes, the financial health of these Midlands schemes is volatile with the total shortfall widening from £2.3 billion on January 1 last year to £5.7 billion by the year end.
James Mullins, senior actuary at Hymans Robertson, said: “The credit crisis and financial turmoil since September has meant that 2008 was a torrid year for pension schemes. Since the start of 2008, the combined pension scheme shortfall for some of the biggest Midlands-based pension schemes has more than doubled.
"This is largely because stock markets (where these pension schemes invest most of their money) fell by about 30 per cent during 2008. The turmoil in the financial markets has caused the value of assets held by pension schemes to fall significantly.”
A bright spot for scheme managers is that the fourth quarter of 2008 had a fall in expectations of future inflation which means that pensions are expected to cost less in future. Mr Mullins added: “These market changes will not have affected all pension schemes to the same degree as it will depend on how much of their money is invested in the stock market versus other investments such as bonds and cash.”
Hymans Robertson says its calculations are based on “sensible assumptions” about investment returns and inflation. It has not factored in the full impact of the credit crisis on investment return assumptions companies would normally use when assessing the financial health of schemes.
Benchmark long-term corporate bonds have fallen but their yields have risen strongly. Factoring this into calculations would result in the schemes showing a “modest” surplus.
“However, Hymans Robertson believes this would not be a prudent way to assess these pension schemes’ financial health,” the report said.
Mr Harper said scheme trustees would need to re-assess how much investment risk their scheme could afford. “However, this is not a time for knee-jerk reactions. It is essential that trustees agree a long-term plan to ensure they are well-prepared to capitalise on investment opportunities. It is now commonplace for trustees to agree ‘trigger points’ such that if the stock market improves to a certain level the pension scheme automatically banks some gains by moving a preagreed portion of money out of the stock market to less volatile investments. This makes the scheme less risky and more secure.”
* The pension scheme of the former Leyland DAF truck company has been bought for £230?million.
The scheme, which has almost 5,000 members, has been purchased by the Pension Corporation insurance company.
Leyland DAF, based in Birmingham and Lancashire, went bust in 1993 and Aon Trust Corporation was appointed as an independent trustee.