BT Group pension shortfall rises to £7.3bn
The shortfall in BT Group’s pension scheme rose in the fourth quarter from its level three months earlier, confounding suggestions that rising Gilt yields would prove a boon to troubled companies trying to close their deficits.
BT reported last week that the pre-tax shortfall in its scheme rose to £7.3bn as of December 31, from £6.7bn at September 30, despite strong equities markets which should have boosted assets and rising bond yields. BT attributed the rising shortfall to “market inflation expectations”, a factor which increases the cost of retirement benefits.
John Ralfe, an independent pensions adviser, said that the BT Group results were likely to be mirrored in the annual accounts of other companies because accounting rules require that liabilities be discounted at the yield available on high-quality corporate bonds, not Gilts.
The rising optimism about economic recovery, which has boosted Gilt yields, has made investors feel more confident about corporate bonds, and yields on these have risen far less than those on government securities.
“The bumper asset returns for pension schemes in 2013, with the FTSE up over 20 per cent, have been largely offset by a corresponding increase in pension liabilities,” Mr Ralfe said. Relative to Gilts, bond yields have fallen by 0.5 percentage points to stand 1 per cent over government securities. Lower discount rates give rise to bigger deficits.
“Since investment returns over the year have done little to close deficits, companies must continue the hard slog of making cash contributions,” Mr Ralfe added.
However, there is also growing evidence that UK companies are trying to take advantage of rising equities markets and rising Gilt yields to reduce the risk in their pension schemes, regardless of the effects on accounting disclosures.
With risks reduced, companies are more likely to seek an insurance company willing to take on their pension assets and liabilities, removing these from company balance sheets altogether.
The average weighting of bonds in pension schemes run by FTSE 100 companies – which account for the lion’s share of retirement debts – is now 56 per cent of total assets as of September 30. A year ago, the weighting was 50 per cent, while six years ago, it was only 36 per cent, according to a report from JLT Employee Benefits and JPMorgan/Cazenove to be released on Monday.
Charles Cowling, managing director at JLT, said that one reason companies may continue to increase bond weightings is that new accounting rules this year no longer allow them to book profits from expected returns on equities that are higher than their discount rates.
But, he added, the increased weighting is particularly significant in light of the way the relative prices of equities and bonds had moved so far this year. There had been previous occasions when bonds constituted over half of pension assets, but those had been times when it was market movements, rather than conscious asset allocation decisions, were at work.