Strategy & Operations » Governance » Top companies hide pension deficit exposure

THE UK’s top public companies hide their pensions’ exposure risk from investors, potentially leaving companies open to another BHS-style pension funding scandal, according to new research.

Around two-thirds of FTSE 350 companies, whose defined benefit pension scheme assets total around £332bn, do not disclose the deficit relative to the funding target, Lincoln Pensions’ research found. The funding target is what dictates contributions.

More than half of FTSE companies also hide the amount of time it would take them to pay the deficit under deficit recovery plans, according to the research, which covered the latest released annual report of every FTSE 350 company with UK pension obligations as at 12 October 2016.

Not a single FTSE 350 company provided a measure of future funding risk volatility, such as value at risk, while only around a third referred to the DB pension scheme’s hedging strategy, Lincoln found.

“The fact that a majority of the FTSE 350 neither disclose the size of their technical provisions deficit – the key figure for setting funding contributions – or the length of recovery plans to fund their deficits leaves members and stakeholders in the dark, having to guess the level of commitment a business has made to its pension scheme,” said Darren Redmayne, CEO, Lincoln Pensions.

Reveal the risk

Based on the research findings, Lincoln Pensions is calling for all listed companies to disclosure their pension exposure risk to allow investors and other readers of annual reports and accounts to better understand cash flow and funding risks associated.

Directors of listed companies are now required to make a ‘long-term viability statement’ which, requires a robust assessment of longer term risks. This new requirement provides the ideal catalyst and justification for obligatory additional disclosure in relation to pension obligations, Redmayne said.

“Over time, our view is that this best practice should be extended to all company disclosures, listed and non-listed. We believe that many of the issues associated with recent high profile cases, such as BHS and Tata Steel, could have been highlighted much earlier through greater transparency in the accounts,” he added.