More than half of FTSE 350 companies have risky pensions
The defined benefit pension schemes of more than half of FTSE 350 companies are invested heavily in high-risk assets, potentially jeopardising employees’ savings.
The risky investments taken by 225 corporate DB schemes could leave the companies that support them collectively exposed to losses of £100bn, according to a report by Lincoln Pensions, an investment advisory business.
These potential losses could create additional problems for the FTSE 350 companies, which are already attempting to reduce a £72bn funding shortfall across their pension schemes.
The 225 companies would be responsible for bailing out the schemes if their investments in risky areas such as equities, hedge funds and property went wrong, finds the report.
Matthew Harrison, managing director at Lincoln Pensions, said these companies needed to think carefully about whether they are taking appropriate risks. The larger companies with the biggest liabilities are taking on the most risk, which he said was “counterintuitive”.
He added: “Some of those companies are disproportionately relying on investment returns to close their pension deficit. This could go well and they could close the deficit, or it could go wrong and the deficit could widen.”
Taking on excess risk to tackle deficits goes directly against guidelines set out by the Pensions Regulator, which prefers companies to use cash injections to prop up underfunded DB schemes.
Peter Bradshaw, national accounts director at Selectapension, a pensions-focused data provider, said corporate pension schemes were already under pressure following the introduction of pension freedoms, which enable retirees to withdraw their savings as a lump sum.
“The schemes are in deficit, so this calls into question whether the companies will be able to meet their liabilities,” he said.
Of the 172 companies that reported a deficit on their most recent balance sheets, 15 companies accounted for more than three-quarters of the £72bn funding shortfall.
The advisory company estimated that there was a 5 per cent chance that these investments could lose their value entirely.