ECONOMIC OUTLOOK | Pensions
A
particular feature for
European corporates is
the scale of UK pension
liabilities. Research into 75
constituent companies listed
on share indices in France, Germany, Italy,
the Netherlands, Spain and Scandinavia
shows that they were committed to UK
pension obligations of more than £100
billion up to 31 December 2015.
On average, UK schemes account for
28% of these companies’ global liabilities
related to DB pensions. Furthermore, UK
pension contributions represent around
32% of global DB contributions on average.
However, the average proportion of
global revenue produced by the UK
subsidiaries of these firms is just 7%.
(see chart overleaf).
European companies with UK
businesses are potentially exposed
to significantly greater pensions risk
than the scale of their operations in
the UK would suggest. Companies are
also paying considerably more per
head – in 2015, the average UK pension
contribution per UK employee was over
three times greater than the equivalent
average for the global parent.
This may reflect cultural differences
– for example, non-UK businesses may
operate in countries where state pensions
are comparatively more generous than
in the UK. Also, DB pensions are more
contribution per employee was also
higher than the FTSE350 for companies
surveyed – the implication of this being
a faster return to full funding relative to
UK-listed firms.
Between 2014 and 2015, DB contributions
by UK subsidiaries increased by around 6%.
INVESTMENT RISKS
In most cases, the total level of equity
holdings held in the UK scheme(s) was
substantial relative to the UK firm’s net
assets. There were a small minority
of cases where the equity allocation
exceeded the net assets of the UK
subsidiary sponsor company. Exposure to
equity markets via scheme investments
represents a latent risk for sponsors.
Although the UK subsidiary might be
able to rely on generous support from the
European parent, the exposure to interest
rate risk for some firms is noteworthy.
While schemes may reduce their equity
holdings such that assets are aligned
more closely with scheme liabilities, this
could lead to a significant increase in the
expected cost of providing benefits under
the scheme.
THE IMPACT OF BREXIT
The existing risks to European sponsors
of UK schemes are significant. With Article
50 to be triggered in the near future,
these risks could change (with potentially
Economically, the fall in the value of sterling
could mean that European parents are
better positioned to support their UK
schemes in the immediate term
prevalent in the UK than in most other
European countries. Alternatively, it may
reflect differences in local scheme funding
regulations. Nonetheless, it highlights
the materiality of pension liabilities for
overseas corporates with UK subsidiaries.
EUROPEAN COMPANIES CONTRIBUTE
MORE THAN THE FTSE350
In 2015, the average funding level of
the schemes on an accounting basis
was marginally higher than over the
equivalent period for FTSE350 companies.
Interestingly, DB pension contributions
as a proportion of staff costs were higher
than the FTSE350. The average deficit
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DIRECTOR OF FINANCE
a positive impact as well as negative)
following the exit of the UK from the
European Union.
One potential area is the UK funding
regime. If the government decides to
offer more flexibilities to DB sponsors
following on from February’s Green Paper
– that is, to pay much less attention to
deficits and more enthusiasm in providing
benefits in full as they fall due; however,
this could be extremely disruptive and
outside the European legislations. Some
commentators have lobbied for the DB
regulatory regime to move in a more
liberal direction. There might even be a
possibility that unpopular and complex R
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