Companies’ ability to support pension promises returns towards pre-recession levels, reveals PwC analysis

Published at 00:08 AM on 09 June 2014

FTSE350 companies’ ability to support their defined benefit (DB) pension obligations has dramatically improved and is close to reaching pre-recession levels, according to PwC analysis.

PwC’s Pensions Support Index (PSI), which tracks the overall level of support provided to DB schemes of the FTSE350 companies, shows that the economic recovery is feeding through to make pension schemes more manageable.

The Index has improved by seven points over the second half of 2013 to a score of 83 out of a possible 100. This is the largest positive six month improvement in the Index since December 2009 and is only five points away from the pre-recession Index high in June 2007 of 88.

The fall in pension deficits can be attributed to an improvement in company performance and a sharp rise in gilt yields in the second half of 2013 (10-year UK gilts improved from 1.4% in July 2012 to 3% by the end of December 2013). This upswing in gilt yields has lowered the present value of future pension liabilities for companies.

Despite an overall improvement in the Index’s score, this movement is not universal; 10% of FTSE350 companies with DB schemes still have an individual score of less than 50. This indicates that their pension deficits are still large when compared to the financial strength of their company.

Jonathon Land, pensions credit advisory leader at PwC, said:

“It’s encouraging that the economic recovery is finally translating into improved company performance and more manageable pension deficits for FTSE350 companies. Given that the forecast for GDP remains strong, we anticipate this improvement to continue.

“The increase in score is an opportunity for companies and trustees to refresh their scheme’s investment strategy in light of their strengthened employer covenant. The Pension Regulator’s new code of practice, which puts the employer covenant at the heart of the pension scheme funding process, makes this shift in thinking even more important.”

Julia Dickson, partner in pensions credit advisory at PwC, said:

“Weaker PSI scoring companies with poor company performance are likely to be the most impacted by changes to the PPF levy. These companies need to start taking action now in considering how to deal with this change.”

Ends 

Notes

1. PwC’s pensions support index tracks the relationship between the financial strength of FTSE350 companies and their defined benefit pension obligations, indicating the overall level of employer support offered to these pension schemes.

2. The financial strength of the company is based on net assets, operating profit, profit before tax, cash from operations and market capitalisation, against the company’s estimated pension deficit.

3. The Index is out of a possible score of 100. If a score of over 90 is achieved this would indicate that companies’ legacy DB pension issues are under more control.

4. The calculations are based on historical data from publically available company statutory accounts and market capitalisation data.

5. To download a copy of the full report please visit www.pwc.co.uk/psi


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