THE profits of FTSE 350 companies in 2015 could be at least £1.8bn lower than in 2014 due to pension costs, consultants Mercer have said.
According to Mercer’s Pensions Risk Survey, the accounting deficit of defined benefit (DB) pension schemes for the UK’s largest 350 listed companies has deteriorated further, with deficits exceeding £100bn at 15 December 2014, research by consultants Mercer has found.
On 16 December, AA corporate bond yields fell to a record low of 3.38% per annum compared with 4.42% at the end of 2013. As a result, DB pension liability values have increased to about £720bn and asset values have changed to about £600bn.
Record lows in high-quality corporate bond yields, which are used to measure the pension liability reported in company accounts, have driven the increase in reported liabilities, while 2015 profits will be hit by an interest cost that is applied to their deficit position at the start of the year, Mercer said.
“Given the growth in pension deficits seen over 2014, this interest cost is likely to be at least £1.8bn higher in 2015 than in 2014, in aggregate. This means that the profits of FTSE 350 companies in 2015 could be at least £1.8bn lower than in 2014 due to pension costs, all other things being equal,” said Warren Singer, Mercer’s UK head of pension accounting.
Ali Tayyebi, senior partner in Mercer’s retirement business, added: “Falling bond yields have clearly put DB pension plans under a lot of strain in the latter part of this year. Pension plans with higher levels of assets which hedge the effect of falling bond yields will have fared noticeably better during this period.
“Many of these plans will have increased their allocation to such assets by taking advantage of often short-lived opportunities when market conditions have been more favourable. This emphasises that a more nimble approach to taking advantage of improved conditions should be a key part of the risk management toolkit for every pension scheme.”