The total final salary pension deficits of the UK’s 350 largest companies have trebled in a year, it was reported yesterday – as Royal Mail, owner of one of the largest defined benefit (DB) schemes in the country, confirmed it had begun consulting staff on whether to close its fund to future accruals.
According to Mercer, deficits among FTSE 350 schemes stood at £39bn at the end of 2015, a figure that had risen to £137bn by the new year, despite an end-of-year stock market surge that ought to have boosted the value of investments.
Separate research from JLT Employee Benefits show that FTSE 100 company schemes are now only 78 per cent funded – 10 percentage points below the level of a year ago.
Royal Mail said that, although its scheme is in surplus, it expects the cash cost of its plan to rise from £400m annually at present to £1bn by 2018 – a figure it suggested was unsustainable. Last year, the business said it only generated free cash flow of £290m; its pension scheme has around 410,000 members and one of the highest funding levels (the level of assets versus liabilities) among large UK businesses.
Danny Cox, head of advice at Hargreaves Lansdown, said: “The general trend for final salary pension deficits to rise has been going on for some time, as people are living longer. But in the last six months in particular we have seen a double whammy, as there has also been a significant fall in government bond yields, which have increasingly been used by firms to try and match their pension liabilities.
“In light of this, it’s no surprise Royal Mail is now trying to reduce its liabilities – because these go straight on to its balance sheet.”
Warnings about the continued health of its pension scheme were first raised by Royal Mail last summer, and yesterday the business’s group HR director, Jon Millidge, described switching staff to a defined contribution option as the “best available” measure to ensure Royal Mail continued to provide “sustainable, good-quality pension benefits and as many high-quality jobs as possible”.
The union representing Royal Mail staff has already indicated that removing the DB pension scheme after the consultation process ends in March could result in strikes. Terry Pullinger, deputy general secretary of the Communication Workers Union (CWU), said: “Any attempt to introduce any un-agreed change by the business would be met with an industrial action ballot.
“We move from shadow boxing to the ring, and negotiations will now begin in earnest. The CWU is fully committed to developing an agreed solution that maintains the pension promise of a wage and dignity in retirement.”
Le Roy van Zyl, senior consultant at Mercer, predicted that unease over the state of deficits was only likely to increase in 2017: “Pension scheme trustees and sponsors face the new year with significant uncertainty. Brexit is likely to move beyond a mere intention, and the effect of new leadership in the US will become clear – not to mention other major events such as the French presidential elections.”