U.K. companies will need to reach deeper into their pockets next year to make contributions to their defined benefit pension plans after soaring liabilities have left gaping deficits.
Despite the recovery in stock markets, reported midyear corporate pension deficits surged, and consultants say the worst lies ahead.
Contributions at some companies will jump an estimated 70% or more in 2010 based on pension liability valuations performed in 2009, said Sarah Abraham, a consultant and actuary at Aon Consulting in Manchester, England. That would mean adding £3 billion to £5 billion ($4.9 billion to $8.2 billion) to the annual £20 billion paid into the 200 largest corporate plans.
“I expect most of the news is still to come,” Ms. Abraham said. “When trustees come with their begging bowl, (corporate officers will be) suddenly getting a shock.”
Additional contributions will be on top of hefty increases made this year. Thirty percent of FTSE 100 companies said they would kick in an additional £5 billion combined to pension plans this year, according to a recent report by KPMG International.
“We believe that there will be a continuing trend upwards in contributions to defined benefit schemes due to pressures to address current deficits and increase prudence in funding measures,” according to the report, which was based on 2008 annual reports.
Meanwhile, in addition to upping contributions, deficits are forcing corporate pension fund executives to postpone long-term plans to lower investment risks by exchanging equities for bonds.
“The trend had been very much to take risk off the table,” said Chris Hurry, Glasgow, Scotland-based partner and actuary at Hymans Robertson LLP. “Pensions had to put their derisking programs on hold when funding levels started to fall.”
Other consultants said they haven't yet seen trustees making investment changes. In fact, Carl Hess, global practice director, investment consulting with Watson Wyatt Worldwide in New York, said some trustees are cutting back on risk if they view their employer's ability to fund the plan as weakening from the economy and sizable pension deficit.