Scots company pensions ‘have £4.2bn deficit’

The deficits of Scottish company pensions “remain stubbornly persistent at around £4.2 billion” according to the latest Hymans Robertson’s annual Scottish Pension Index report.

Deficits have not improved from the level they were at two years ago “despite companies paying in typically £1 billion per year in deficit contributions,” said Hymans Robertson.

“Pensions volatility risk is significant — for example deficits more than doubled for a period over July and August 2015 (when share prices slumped).

“In more recent times, a fall of 7% in UK equities (shares) since the end of December has contributed to a typical funding level drop of 4% in the early stages of 2016.”

A decline in company bond yields has made matters worse for Scottish pension funds, the report said.

“Corporate bond yields declined by 1% p.a. over 2014 adding 20% to liabilities, whilst UK equities returned a meagre 1%,” said the report.

The report analyses the pensions of Scottish headquartered plcs and leading private companies and “puts the pensions commitments of Scotland into the context of the businesses supporting them.”

It also provides a comparison between pension deficits of Scottish companies and those of FTSE350 companies.

“The pension burden for Scottish plcs remains greater than for the UK FTSE350,” said the report.

“It would take the typical Scottish company approximately six months of earnings to pay off the pension deficit versus one month for the UK FTSE350 companies.

“The comparable figures last year was three months for a typical Scottish company whilst it remained one month for the UK FTSE350 companies.”

The report continued: “The typical Scottish company contributed one month of earnings on legacy pensions: whilst the typical FTSE350 company contributed two weeks’ worth of earnings.

“On this basis, pension deficits will persist for longer than average for Scottish companies.”

Hymans Robertson said year end figures masked significant pension volatility risk at Scottish company pensions — their deficits in July and August 2015 fluctuated from a low of £2.6 billion to a high of £6.5 billion.

The report said Scottish company pension schemes are typically more heavily invested in “growth assets” than their UK counterparts.

“The typical Scottish company exposes twice as much of its earnings to pension volatility than the UK-wide average,” said Hymans Robertson.

“While Scottish schemes are typically less mature, allowing a longer term view of investment returns, this volatility leaves Scottish businesses more exposed to pension shocks.”

(More to follow)