| Equity to bond pension switch could hit company profits |
|
|
| 06/11/2005 | |
|
The profits of FTSE 100 companies could drop by £3.8 billion if pension funds pursue the switch from equities to bonds, according to estimations by the Pension Adviser Review (PAR). An increasing number of pension schemes have been pondering a move toward fixed income as part of the push toward liability driven investments (LDI) in the wake of the implementation of the FRS 17, which favours less risky assets. Under FRS 17, a mark-to-market accountancy standard, the rates of return expected to be earned on pension assets feed directly into the company's profits. Lower returns on fixed income will therefore translate into lower profits. On average, companies expect to earn 2.8% more on their equities than their bonds. "If pension funds pull out of equities, their sponsoring companies will lose this extra contribution to their profits," PAR boss Keith Faulkner warns. PAR estimates that FTSE 100 companies alone would lose £3.8 billion in profits each year under FRS 17, growing to £11 billion for all UK companies with defined benefit pension schemes. Assumptions Pension schemes are drawn to LDI designs in order to avoid the deepening of their pension deficits, currently estimated by PAR at about £46 billion for the FTSE 100 companies. Those deficits are very sensitive to changes in the actuarial assumptions used to calculate the liabilities. According to PAR's calculations, a reduction of 7.5% in liabilities of FTSE 100 companies would lead to a fall in the global pension deficit of over 40% to £26bn. Although FRS 17 was intended to be fairly prescriptive so that companies would have relatively little latitude in their choice of assumptions, wide variations exist. "Although the company has the final say on the choice of assumptions, they are required to take actuarial advice so the end result will be heavily influenced by the big actuarial firms," Faulkner explains. "Remembering that a change of just a half percent in one or more of the key assumptions can change liabilities by 7%, 8% or more, we were surprised to find that differences of up to three per cent were not uncommon, even among companies advised by the same actuarial firm." In a previous study, PAR found that the Big Three actuarial firms – Hewitt, Mercer and Watson Wyatt – continue to exert a stranglehold in advising the larger pension schemes. Together, they control 75% of the FTSE 350 pension schemes and almost 85% for the FTSE 100. J.L. |
|
Related articles |
|
Articles of the same Topic : Accounting
|
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it