Pension deficit of UK's leading companies equivalent to 70% of their profits

Combined deficit of the UK’s top companies is 70% of their profits

The combined deficit of the UK’s top companies is £62bn with the percentage of their profits higher than that after the financial crisis. The total deficit of FTSE 350 companies is £62bn which is 70% of their profits.

Deficit is the difference between the expected liabilities of commitments and the fund available to companies for payment.

The deficit as a proportion of profits for 2016 is higher since the financial crisis, following a £12bn rise since 2015. The deficit has grown because of pressures on pension schemes. Although, companies have set funds for pensions, schemes are getting affected by factors such as rising life expectancy and lower returns on investment.

A report from the actuarial consultancy Barnett Waddingham shows the deficit has risen sharply as a proportion of profits in the past five years, from 25% of the £214bn pre-tax profits of the FTSE 350 in 2011. The pension shortfall for 21 companies is more than 10% of their value, which Barnett Waddingham terms alarming. However, the actuaries said recent data suggesting years of austerity had seen gains in UK life expectancy grind to a halt could provide “welcome respite for companies”. It showed that the average age of death was levelling off at 79 for men and 83 for women.

Nick Griggs of Barnett Waddingham said:

“Comparing the pension deficit to profits is a simplification, but it helps to put the scale of the challenge into context. Unless companies are profitable over the long term, they can’t generate enough cash to meet their liabilities, including the pension deficit.”

However, Griggs said, as long as “longevity increases do not provide any nasty surprises”, the deficit problem could be solved with higher returns and rises in long-term interest rates.

“The deficit is essentially the difference between two much bigger numbers, and a few gentle economic triggers could completely change the picture,” he said. “This is why many companies are not rushing to clear deficits quickly with additional cash contributions.”

Read More: Politicians to probe UK’s biggest pension fund