Barnett Waddingham research: Employers face defined benefit risks

Twenty-nine organisations in the FTSE 350 have deficit contributions that exceed free cashflow, according to new research by Barnett Waddingham.

The research highlights the impact defined benefit (DB) – or final salary – pension schemes are having on UK businesses.

In addition, for more than 70 organisations the annual DB deficit contributions are higher than the contributions being paid to pay for pension benefits being earned for current employees.

For the majority of organisations, the DB scheme deficit is a manageable annoyance.

However, for more than 10 organisations, the deficit exceeds 20% of the market capitalisation of the firm and for 39 organisations it exceeds 20% of the equity value.

For a significant number of firms, the DB scheme deficit is having a significant impact on the gearing ratio, a measure used to assess financial risk, which could ultimately impact on an organisation’s ability to raise finance.

On average, the gearing ratio was worsened by 3.4%, however, for 16 firms it was more than 10%.

The research project, carried out by Barnett Waddingham with input from the Centre for Global Finance at the University of the West of England, is designed to allow organisations with a DB scheme to benchmark themselves against their peers.

Nick Griggs, head of corporate consulting at Barnett Waddingham, said: “The research shows the pension generational divide that exists as many of the UK’s largest employers are now paying more to plug defined benefit scheme deficits than they are to fund the benefits earned by current employers each year.

“Organisations are directly exposed to significant risks through their pension scheme. Our research highlights the strain that deficit contributions can place on organisations when these risks materialise, particularly in recent times when, for many organisations, cashflow has been tight.”

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