Contributions to U.K. funds up 76% in year

LONDON — Employer contributions to corporate pension plans by Britain's largest public companies jumped 76% to £11 billion ($20.3 billion) during financial year 2003 — and might jump higher next year.

"I would be surprised if next year contributions did not continue to increase," said Stephen Cooper, head of valuation and accounting research at investment bank UBS Ltd., London, which just surveyed pension contributions made by FTSE 100 companies.

By comparison, employer contributions to the 100 largest U.S. corporate plans increased 172% last year, to $51.5 billion (Pensions & Investments, July 12).

Many British companies — including GlaxoSmithKline, Marks & Spencer and BP — made cash contributions far in excess of their annual service, or benefits, cost, the report found. They did so to reduce their pension deficit, which would make them more attractive to investors.

It is likely these additional contributions will be invested in bonds as U.K. pension plans try to match liabilities and reduce their overall equity exposure, said Raj Mody, principal consultant at Hewitt Bacon & Woodrow, London.

GlaxoSmithKline PLC, Brentford, made a total pension contribution of £598 million, which was three times the firm's service cost. During 2003, the group had a £1.8 billion deficit across its pension plans worldwide, according to the company's annual report.

The bulk of the cash contribution went to the group's £3.6 billion U.K. pension plan and was given to the plan's incumbent bond managers — Schroders PLC, Morley Fund Management Ltd. and Legal & General Investment Management, all of London, said Martin Mannion, the pension fund's finance manager.

Plan trustees intend to increase the allocation to bonds, which was 15.5% as of Dec. 31, but Mr. Mannion would not say by how much. Watson Wyatt Worldwide, Reigate, England, is advising.

Trustees of the £3.6 billion Marks & Spencer PLC Pension Scheme, London, have parked in short-term bonds the £400 million contribution made to the plan, said Lynn Collins, head of corporate pensions. The contribution represented 431% of the group's service cost.

The cash will be invested in longer-term investments once trustees complete an asset-liability study; she would give no further details. Watson Wyatt is advising.

BP PLC, London, contributed £1.5 billion ($2.5 billion) — more than four times its service cost — to its worldwide pension plans with assets totaling $27.8 billion. Steven Lockhart, financial controller at BP Investment Management Ltd., said the bulk of the assets were invested in the group's U.S. pension plan. According to the group's 2003 annual report, the $6.8 billion U.S. plan had a deficit of $852 million.

Lloyds TSB PLC, London, made one of the lowest contributions. Its contribution of £138 million was just less than half of its £320 million service cost for 2003. The group's pension plans are 77% funded and have a total pension deficit of £3.3 billion.

Wayne Baker, senior finance manager for the group's £10.6 billion pension plans, said Lloyds had contributed "at a fairly high rate" to its largest pension plan since last July and had increased its contributions from January 2004. He said the group followed recommendations from its actuary, Watson Wyatt. He would not comment on asset allocation.

Lloyds TSB's pension deficit represents 15% of the group's total market capitalization.

Other FTSE 100 firms have plan deficits that represent up to half of their market capitalization.

According to the UBS report, BAE Systems PLC, London, faces a pre-tax pension deficit of £3.2 billion, representing 51% of the company's market cap as of June 30, 2004 — the largest pension deficit proportional to market cap of all FTSE 100 companies.

At the end of June, FTSE 100 companies faced an aggregate funding deficit of £56.4 billion, compared with £88.4 billion at the end of March 2003.

"There is nothing wrong with having a pension deficit, it's another form of debt," said UBS' Mr. Cooper. "For many of these companies, the deficits will remain unless the equity markets were to double."

There is, however, a financial incentive to contribute to a plan: a tax saving for the plan sponsor.

The report also shows that FTSE 100 company pension plans sold equities during fiscal 2003 worth £6 billion, or 4% of net assets, but their overall allocation to equities barely changed from the year before, at 59.8% of plan assets compared with 59.4% in fiscal 2002.