- Scheme funding deficits could be as high as £295bn
- Companies with valuations this quarter also worried
If all UK defined benefit schemes had to have a mark-to-market funding valuation at 30 September, the aggregate deficit could be as much as £295bn according to KPMG. Historic data from the pensions regulator shows that that scheme funding liabilities have on average been about 105% of Pension Protection Fund (PPF) liabilities (i.e. 5% higher) adding £50bn to the recent data for September published by the PPF. The figure assumes that trustee funding measures continue to be a little more prudent than the PPF level of liabilities on average. At the same time the impact of the latest round of quantitative easing could depress long-dated gilt yields, leading to a further £45bn increase in deficits.
David Costley-Wood, restructuring partner at KPMG, commented: “In the normal course of events, a spike is not important as pension deficit values move all the time and a company’s next valuation date may be some distance in the future but it will be a concern for companies who face either a valuation date shortly or those involved in transactions or restructuring. Any refinancing or disposals are complicated by the increased creditor claim the scheme holds. At the same time, pension trustees will be minded to ask for increased cash contributions, which may be in scarce supply for many companies. The other growing trend we are seeing is the emergence of pensions ‘zombies’ - companies with marginal growth or loss – which may well be pushed into insolvency if their pension deficit turns into a ‘black hole’.”
Paul Cuff, pensions M&A partner at KPMG, commented: “Pension funds have already taken a battering over the past few months from both tumbling equity markets and falling gilt yields, but this is set to be compounded by the second round of quantitative easing, which will see gilt yields fall even further; piling on the pressure in the boardroom. Ultimately if quantitative easing has the desired effect of economic stability and growth it will be positive for pension schemes and will improve their long-term health. But in the short-term because gilt yields underlie many pension scheme valuation models it creates significant pension deficits. October has seen some recovery in equity markets which will reduce deficits, but the environment remains uncertain and the full impact of quantitative easing has not yet been felt.
“However, we are seeing companies trying to find ways to grapple with the leviathan. Recent examples include companies offering pensioners increased upfront pensions in exchange for future increases.”
Costley-Wood went on to say: “The board have to hope that the trustee and regulator will be sympathetic to the artificially exacerbated situation caused by quantitative easing. Moreover, they will also have to hope for the understanding of wider stakeholders such as their lenders and credit insurers. Trustees are also in a difficult situation, under pressure from the regulator to extract more cash and from companies to explain why the benefit of the cash previously put in has been lost through asset or liability movements outside their control. Of course, the size of the deficit is less important for companies which do not have a valuation for some time but those with valuations due at the end of the next quarter – particularly those in distress - will be the most worried.”
- END -
For further information please contact:
Sorrelle Cooper, Senior PR manager, KPMG: +44 20 7694 8527
sorrelle.cooper@kpmg.co.uk
Notes to Editors
Methodology for the analysis
The PPF published an aggregate PPF deficit figure in their 7800 Index of £196.4bn as at 30 September 2011 – assets of £963.8bn vs. liabilities of £1,160.2bn
Scheme funding valuations use different measures and vary from scheme to scheme. But research from the Pensions Regulator, which has been collecting data since 2005, shows that scheme funding liabilities have on average been about 105% of PPF liabilities, i.e. 5% higher. The differential has varied between 100% and 110% over the last four years.
Scheme funding valuations depend on agreements between companies and trustees and are difficult to predict in advance. Effectively they represent a prudent estimate of the cost of meeting pension payments from the Scheme on a going concern basis, based on the investments likely to be held in the Scheme and the strength of the employer.
Based on the historical average, if scheme funding liabilities at 30 September 2011 were 5% higher than PPF liabilities then scheme funding liabilities would be £1,218.2bn (5% higher than the PPF’s 1,160.2bn) giving aggregate scheme funding deficits of £250bn.
Commentators have suggested that the latest £75bn round of Quantitative Easing might depress long-dated gilt yields by around 25 basis points. A 25 bps fall in discount rates for actuarial valuations would lead to a further c. £45bn increase in deficits (this is in line with the NAPF estimate and also reflects asset gains), increasing them to £295bn in aggregate.
Market movements clearly make the position volatile – October has already shown some improvement so far - and each Scheme will be different. But there are few schemes that will look healthy on a mark-to-market basis when yields are as low as they are today.
PPF data at 30 September 2011:
|
|
|
|
Sep-10 |
Aug-11 |
Sep-11 |
|
Aggregate balance |
-40.2 |
-117.5 |
-196.4 |
|
Funding ratio |
95.9% |
89.2% |
83.1% |
|
Aggregate assets |
951.7 |
974.2 |
963.8 |
|
Aggregate liabilities |
991.9 |
1091.6 |
1160.2 |
Pensions Regulator data from their latest “orange book” (June 2011)
Figure 1.7
Distribution of technical provisions as a proportion of s179 liabilities
|
|
|
|
|
Tranche |
T1 |
T2 |
T3 |
T4 |
Average |
|
95th percentile |
154.3% |
160.0% |
154.0% |
149.4% |
154.4% |
|
Upper quartile |
115.9% |
126.3% |
123.4% |
114.3% |
120.0% |
|
Median |
101.7% |
110.5% |
108.4% |
99.5% |
105.0% |
|
Lower quartile |
89.4% |
98.1% |
95.5% |
85.7% |
92.2% |
|
5th percentile |
73.5% |
80.6% |
77.5% |
67.4% |
74.8% |
About KPMG
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.
