Pension deficit ‘remains priority’ for FTSE 100 companies

ALMOST a third (32%) of FTSE-100 companies cannot meet pension fund deficits from current discretionary cash flow, according to a new report.

KPMG’s latest Pensions Repayment Monitor has discovered that this is the situation despite more than £11bn being spent on pensions deficits in 2009.

This represents the highest level in the survey’s five-year history and compares with 22% of blue chip companies in 2008 that could not pay off their pension shortfall in any realistic time frame.

Blue chip companies now fall into two categories: those who could pay off their pension deficits in a very short time frame from free cash flow and those who cannot pay off their deficits within any reasonable time frame without sacrificing business growth. 

If dividends and capital expenditure were added back to discretionary cash flow then in theory 97% of the FTSE 100 could clear their pension fund deficits within three years but, in KPMG’s view, this could be to the detriment of the businesses well-being.

Richard Hennessy, head of Pensions at KPMG in the North West, said: “At first sight these figures look alarming. But they mainly reflect the consequences of the economic downturn on companies’ profits and cash flow. 

“The key message to sponsoring companies, pension fund trustees and regulators is to maintain a long-term view and avoid knee-jerk reactions. The most important thing in securing the future of pension provision is to secure the future of the business, not the other way round.”

Other key findings of the report showed that 46% of the FTSE 100 would be able to pay off pension deficits from discretionary cash flow in one year and 63% are able to pay off deficits in three years. This compares to 62% and 75% respectively in 2008. Furthermore, just three companies now show an accounting surplus compared with 12 in 2008 and 21 in 2007.

Mr Hennessy said: “This provides further evidence of the trend for businesses to spend increasingly more on commitments made in the past rather than on investment in the company or new benefits for employees.”

The survey also found that the recent Government moves to change the way pension rises are calculated, by using the consumer price index (CPI) rather than the retail price index, (RPI) will reduce deficits but have limited impact on the ability of companies to pay off deficits. Far more important are measures designed to strengthen the profitability of companies themselves.

Mr Hennessy said: “As the economy comes through the current cycle we expect deficits to fall and businesses to strengthen. Our analysis shows that improving companies’ profits and cash flow has a far greater impact on businesses ability to finance deficits than moderate changes to past benefits.

“It will therefore be important for trustees to support the competitiveness of their employer and its ability to access finance. This will include recognising that capital providers are essential to business success and the right balance needs to be struck around pension funding.”