As many as one in five FTSE 100 companies would struggle to meet their commitments to their pension scheme during an economic downturn. This is the conclusion of research conducted by advisory firms, Cardano and Lincoln Pensions, using a combination of factors including funding and covenant and investment risk to create a ‘Worry Index’.
The comprehensive review of the health of FTSE 100 schemes revealed that the overall level of risk facing defined benefit pension schemes, which pay guaranteed pensions related to salary, has increased by 20 per cent over the last three years.
The 20 per cent of FTSE 100 companies that fall into the ‘worry zone’ and are defined as firms where the pension risks are equal to 30 per cent or more their market value. During an economic downturn Cardano and Lincoln claim the pension deficit of the FTSE 100 would increase by £100 billion – equivalent of four year’s pre-tax profits.
The Worry Index also revealed that some sectors were struggling more than others. While oil and gas had shown some improvements during 2017 (thanks to increasing commodity prices), firms involved in consumer goods and services had struggled – showing the largest increases to their ‘worry’ scores.
Commenting on the findings, Darren Redmayne, chief executive of Lincoln Pensions says: ‘The Worry Index is our version of a stress test for pension schemes. A pension is only as good as the covenant standing behind it. This has been sadly demonstrated by cases like BHS and Tata, both were members of the FTSE 100 index in the 1980s.
‘Companies need to be around for decades to stand behind defined benefit pension promises. Over such timeframes, markets change and economic events - such as experienced in 2008 - can be expected to occur from time to time. Being able to model the impact of these events is a wake-up call for the industry to more fully adopt integrated risk management as required by the Pensions Regulator.’
This is article was originally written by our sister publication Moneywise.
Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now