Scotland’s industrial legacy means her biggest companies face a continuing battle to fund their pension schemes which are more exposed to the volatile markets.
The annual Scottish Pension Index produced by Glasgow-based consultants Hymans Robertson reveals the combined pension deficits of Scottish-headquartered plcs and leading private companies remained above £4billion in 2013-14, despite £1bn of contributions.
It says the pension burden for Scottish plcs remains greater than for the UK-wide FTSE350, as it would have taken the typical Scottish company around six months of earnings to pay off its pension deficit, compared with only three months a year earlier. In both years the average FTSE-350 company would have needed only one month's earnings
While the average FTSE350 company required two weeks’ earnings actually to fund its pensions, the typical Scottish company needed one month's worth - three weeks of which went solely towards repairing the deficit. The report says three times as much is being spent honouring the promises made to past employees than paying for the benefits that current employees are earning.
It goes on: “Events in recent months have highlighted the downside of remaining exposed to significant market volatility. Poor equity returns coupled with a decline in long term bond yields ensure that deficits have persisted.”
Calum Cooper, partner at Hymans Robertson in Glasgow, commented: “How much extra cash you need to put in depends on how equity markets have performed and on corporate bond yields. In the last three weeks we have seen extreme volatility and we are trying to highlight ways of reducing that.”
He went on: “Scottish companies on average are in a slightly harder place because we have a higher proportion of manufacturing companies who have big pension schemes because they employed a lot of people many years ago.” That meant that “Scottish plcs with larger DB (defined benefit) schemes might find it harder to compete, given that legacy, relative to new industry entrants”, Mr Cooper noted.
Scottish schemes however tended to be less mature, giving more time for deficits to be reduced. “That is one thing to be a little bit less worried about, which also means they can run a slightly more return-oriented investment strategy,” he added.
But Mr Cooper said Scottish scheme members need not be alarmed. “For the vast majority of companies, it is affordable, it is not a case of a pension scheme with a company attached to it. These pensions are a cost burden but not a life or death matter, they generally look affordable.”
He said no scheme could ever offer a cast-iron guarantee. “Ultimately it depends on the company being around for quite a while, though there is a lifeboat in the Pension Protection Fund.” The PPF pays 90 per cent of pensions if companies go under.
Mr Cooper said: “Our focus is to help companies and trustees work together in a multi-year relationship to manage down risk.”
A report this week by JLT Employee Benefits predicted that not a single DB scheme in the FTSE-250 would remain open to new contributions by the end of 2016.
Charles Cowling at JLT said: “With spiralling liabilities and yet more adverse regulations coming into effect from April, such as new tax rules and the end of contracting-out, we believe that the majority of FTSE 250 companies will cease DB pension provision to all employees within 12 months.”
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