British Airways closed its defined benefit plan to new entrants in 2002, citing the FRS 17 requirement as one reason for the move. Other U.K. companies also have pointed to the rule as a factor in their decisions to close plans to new entrants.
In accordance with FRS 17, British Airways said that as of March 31, 2003, its three pension plans had total assets of £8.86 billion and total liabilities of £10.12 billion. The airline operates two defined benefit plans — both closed to new entrants — and a defined contribution plan.
London-based labor union GMB, which represents about 4,500 British Airways employees, said it would oppose any attempt to ask British Airways employees to increase their pension contributions to make up the deficit. Often in the United Kingdom, both employees and employers contribute to defined benefit plans.
"The GMB does not accept that higher employee contributions are the way forward for the pension schemes. Already, new employees are more vulnerable as the final salary scheme is closed to them," said Allan Black, GMB national officer for airports.
Meanwhile, several studies show that the pension funds of the U.K.'s largest companies still have an estimated deficit of between £50 billion to £60 billion, despite recent improvements in equity returns.
In January, London-based consulting firm Hewitt, Bacon & Woodrow said the estimated aggregate pension deficit of FTSE 100 companies — the 100 largest publicly traded U.K. companies — was about £50 billion under FRS 17. That was down from an estimated £100 billion in March 2003 — when the deficit was at its largest — with the improvement stemming from more favorable investment markets, said Raj Mody, principal consultant with the firm in Leeds.
But Mr. Mody noted the improvement does not mean that companies are "out of the woods" and said that any changes in investment markets would affect that deficit.
Watson Wyatt Worldwide also published an estimate of the FRS 17 liabilities of FTSE 100 companies in January. The London-based consulting firm said that it estimated the current FRS 17 deficit of FTSE 100 companies to be about £60 billion — about the same level as it was a year ago.
Robert Hails, a partner at Watson Wyatt in London, said that while the asset position of many pension funds had improved in 2003 because of the recovering equity markets, liabilities also increased because of higher inflation expectations and lower corporate bond yields.
Under FRS 17, corporate bond yields are used to calculate pension plan liabilities.
London-based actuarial consulting firm Lane, Clark & Peacock LLP in its own study said that bond yields fell by about 0.5% in 2003 relative to market expectations about long-term price inflation, inflating pension plan liabilities.
Francis Fernandes, a partner at London-based LCP, said that many companies "will be hoping that returns on U.K. shares of around 20% in 2003 will have brought their FRS 17 deficits back under control." But, he noted, "the position is not so rosy for pension schemes with largely inflation-linked pension promises, because the reduction in real bond yields could easily have added 10% to the FRS 17 liabilities of a year ago."
LCP said that it estimated that in July 2003, the pension fund deficits of FTSE 100 companies totaled £55 billion.
Paul McGlone, principal and actuary at Aon Consulting in London, said, "The things that actually change the FRS 17 numbers are not what companies do, but what the markets that they are exposed to do." He noted changing a plan's investment strategy may have only a short-term effect.