Companies to report substantially larger pension liabilities at year end

Published at 16:18 PM on 27 October 2009

  • Pension liabilities disclosed in accounts have increased by about 25% over the past six months due to falling bond yields, even though assets have typically increased by nearly 20%
  • Extent of pensions liabilities on an accounting basis were masked by high bond yields during the economic turmoil
  • Falling bond yields during economic recovery is causing convergence between liabilities reported on a scheme-funding basis and under accounting rules
  • Liabilities reported by UK plc in end of year accounts could shock unsophisticated investors - FTSE 100 to go from no deficit to a combined deficit of £75bn

Growing pension liabilities reported in UK plc’s company accounts at year end could shock shareholders as the impact of falling bond yields is felt, according to PricewaterhouseCoopers LLP (PwC).

During the recent financial turmoil, higher yields on AA corporate bonds (used to calculate pension liabilities on an accounting basis and subsequently published in annual reports) resulted in reportedly improved pension scheme funding positions. However, over the last six months, bond yields have fallen as the economy begins to stabilise - resulting in reported pensions liabilities growing by about 25% despite assets rising by about 20% in the same period. PwC estimates that, on an IFRS accounting basis, the FTSE 100 total UK pension liabilities will have gone from zero deficit at the end of 2008 to around £75bn by September 2009.

Pension deficits for the FTSE100 on a scheme-funding basis are around £100bn despite improvements in the equity market over the past six months.

Brian Peters, partner, PricewaterhouseCoopers LLP, commented:

“Many companies may be expecting that their pension deficits would have reduced in the last few months due to favourable investment performance. Some will be shocked to find their accounting deficits have increased because liabilities have increased faster than assets as a result of falling bond yields.

“As the investor community makes its decisions based on the accounting numbers, we could see their shock reflected in share prices as these figures grow as a result of falling bond yields. Companies need to anticipate this and consider the extent to which their investors will have factored these issues into their valuation.

“Pension figures reported in next year’s accounts could show a more realistic reflection of UK plc’s pension problem allowing investors and businesses to make better informed decisions and comparisons between companies.”

ENDS



For more information contact:

Lydia Ruffles
Financial Services, PR Manager, PwC 
Tel:+44 (0)20 7212 1798 
Mobile:07966 319 780 
 

Brian Peters
partner, PricewaterhouseCoopers LLP 
Tel:+44 (0)20 7212 3353 
Mobile:+44 (0)7803 668 075 

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