Scottish firms see pension deficits strained by volatile markets -Hymans Robertson

Glasgow-based consultants Hymans Robertson has produced its annual Scottish Pension Index, which reveals that three times as much is being spent by Scottish firms to honour the promises made to past employees than paying for the benefits that current employees are earning.

The findings show that the combined pension deficits of Scottish-headquartered plcs and leading private companies remained above £4 billion in 2013-14, despite £1bn of contributions.

It also points out the pension burden for Scottish plcs remains greater than for the UK-wide FTSE350, as it would have taken the typical Scottish company around six months of earnings to pay off its pension deficit, compared with only three months a year earlier.

In both years the average FTSE-350 company would have needed only one month’s earnings.

While the average FTSE-350 company required two weeks’ earnings actually to fund its pensions, the typical Scottish company needed one month’s worth – three weeks of which went solely towards repairing the deficit.

The report states: “Events in recent months have highlighted the downside of remaining exposed to significant market volatility. Poor equity returns coupled with a decline in long-term bond yields ensure that deficits have persisted.”

Calum Cooper, partner at Hymans Robertson in Glasgow, said: “How much extra cash you need to put in depends on how equity markets have performed and on corporate bond yields. In the last three weeks we have seen extreme volatility and we are trying to highlight ways of reducing that.”

He went on: “Scottish companies on average are in a slightly harder place because we have a higher proportion of manufacturing companies who have big pension schemes because they employed a lot of people many years ago.” That meant that “Scottish plcs with larger defined benefit (DB) schemes might find it harder to compete, given that legacy, relative to new industry entrants”, Mr Cooper noted.

Scottish schemes however tended to be less mature, giving more time for deficits to be reduced.

“That is one thing to be a little bit less worried about, which also means they can run a slightly more return-oriented investment strategy,” he added.

But Mr Cooper said Scottish scheme members need not be alarmed. “For the vast majority of companies, it is affordable, it is not a case of a pension scheme with a company attached to it. These pensions are a cost burden but not a life or death matter, they generally look affordable.” He said no scheme could ever offer a cast-iron guarantee. “Ultimately it depends on the company being around for quite a while, though there is a lifeboat in the Pension Protection Fund.”

The PPF pays 90 per cent of pensions if companies go under.

Mr Cooper said: “Our focus is to help companies and trustees work together in a multi-year relationship to manage down risk.”