It would take a fall in bond yields of just 0.7% over the next three years for the total pension deficit of the UK’s top corporates to exceed profits.
That is the warning from actuarial consultancy Barnett Waddingham, in its latest Impact of Pension Schemes on UK Business report.
In the document’s pages, the consultancy points out that the pension deficit of UK Plc – defined as the top 350 firms – rose by £12bn last year to almost £62bn.
That equates to 70% of the £89bn total profits.
In 2011, by contrast, the deficit totalled £54.5bn – just 25% of the £214bn pre-tax profits of the top 350 firms that year.
Even in 2009 – amid the initial aftershocks of the financial crisis – the deficit as a proportion of profits was considerably lower than it is now, at 60%.
However, the report cautions, in years when the pension deficit has decreased, it has still risen as a proportion of profits.
Further concerns emerged from the consultancy’s research. For example, it found that the top 350 firms’ deficit as a proportion of market capitalisation rose last year, despite strong performance from the equity market.
In the consultancy’s view, that trend may be particularly alarming for the 21 firms whose deficit now exceeds 10% of their market value.
Explaining its methodology in a statement, Barnett Waddingham said: “The pension deficit is defined by calculating the difference between the combined assets and the combined liabilities of the UK’s top 350 firms (excluding those with a pension scheme surplus).
“The figure this produces is essentially the gap between the funds that firms hold to meet these commitments and the funds they are expected to need to pay their pension commitments.
“The deficit has come under increasing pressure in recent years, with rising life expectancy and lower expectations for future investment returns putting more pressure on pension schemes and pushing the deficit upwards.”
Barnett Waddingham partner Nick Griggs 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 noted, “it is also worth bearing in mind that if equity returns continue at the levels seen in the past few years, long-term interest rates rise more than expected and longevity increases do not provide any nasty surprises, the pension deficit problem could solve itself.”
He added: “We must remember that the deficit is essentially the difference between two much bigger numbers and a few gentle economic triggers could completely change the picture.
“This is why many companies are not rushing to clear deficits quickly with additional cash contributions.”