Companies in the industrial sector are overall the worst affected by their defined benefit pension scheme obligations according to research conducted by Barnett Waddingham, the UK’s largest independent firm of actuaries and consultants.
The deficit contributions exceeded free cash flow for six of the 50 FTSE350 companies in the industrial sector, and were on average 18.5% of average free cashflow.
Barnett Waddingham’s research of FTSE 350 companies highlights the impact Defined Benefit (DB) – or final salary – pension schemes are having on UK businesses. The key findings also include:
15 companies (of the 44 companies with a deficit) in the Industrial sector are paying higher annual DB deficit contributions than those in respect of pension benefits being earned each year by current employees.
For many sectors, the DB scheme deficit is a manageable distraction. However, for the Industrial sector the deficit represented, on average, 13.2% of the market capitalisation of the company in 2010 (FTSE350 average was 7.4%) and for 11 companies it exceeded 15% of the market capitalisation. For 12 companies it exceeded 25% of the equity value of the company (after removing the pension scheme liability).
For a number of sectors, the DB scheme is having a material impact on the gearing ratio (a measure used to assess financial leverage or risk) which could ultimately impact on a company’s ability to raise finance. On average the impact has been to worsen the gearing ratio of companies in the industrial sector by 5.7%. However, for nine companies in the Industrial sector, the impact was an increase the gearing ratio by more than 10%.
22% of companies (or 11 of the 50 Industrial companies in the FTSE350) had pension liabilities that exceed the market capitalisation of the company.
18% of companies in the Industrial sector had an equity holding in their scheme that was more than 50% of the market capitalisation of the Company.
The research project, carried out with input from the Centre for Global Finance at the University of the West of England, will allow businesses with a DB scheme to benchmark themselves against their peers. The research focused on the pension obligations of FTSE350 companies although separate analysis has been carried out for the FTSE250 and different industry sectors.
Head of Corporate Consulting at Barnett Waddingham, Nick Griggs, commented: "The research shows the pension generational divide that exists as almost a third of the employers in the industrial sector are now paying more to plug defined benefit scheme deficits than they are to fund the benefits earned by current employees each year."
"Our research shows the widespread impact defined benefit schemes are having on the businesses of some of the UK’s largest companies. A small number of high profile companies are often highlighted for the size of their defined benefit pension obligations but our research shows that they are not alone"
"Companies are directly exposed to significant risks through their pension scheme. Our research highlights the strain that deficit contributions can place on companies when these risks materialise particularly in recent times when for many companies cashflow has been tight."