In These New Times

By Norma Cohen

February 3 2009

Financial Times

Pension liabilities at 13 companies in the FTSE 100 index are now larger than their market capitalisations, according to new analysis from Pension Capital Strategies, a pensions consultancy, and Numis Securities.

Among those whose liabilities now exceed their market value are British Airways, Invensys, BT and Lloyds TSB, with other banking groups joining the list since the end of 2008. A year ago, three FTSE 100 companies were in the same situation.

Charles Cowling, managing director at PCS, said: “With the risks represented by their pension schemes becoming ever more significant, it is not surprising that many companies are looking at strategies for exiting their pension liabilities. We believe that over the next five years the large majority of private sector companies will have closed their final salary schemes to all employees.”

Mr Cowling noted that there is now some evidence that the balance sheet volatility from pension liabilities is also reflected in share price volatility. This in turn is likely to add to pressure to address pension liabilities.

An apparent improvement in company pension accounts is due to a “quirk” in accounting rules, PCS found, rather than a narrowing of the gap between the value of pension promises and assets available to pay for them.

“Through a quirk in accounting rules, pension liabilities are linked to the value of AA (rated) bonds”, PCS noted. “The economic crisis has crippled values of AA bonds but it doesn’t logically follow that pension liabilities are also correspondingly lower.”

Copyright The Financial Times Limited 2009