LONDON (Reuters) - The collective deficit of FTSE 350 pension schemes could be as large as 163 billion pounds compared with the 16 billion pounds surplus implied by accountancy rules, a report by Hymans Robertson said.
The anomaly has come about as a result of the sharp widening of AA-rated corporate bond spreads above government bonds in the wake of the credit crisis.
Since the credit crisis began, AA-rated corporate bonds have yielded as much as 290 basis points above gilts.
Under current accounting rules pension schemes have to calculate their liabilities using a discount rate generally based on AA-rated corporate bond yields. A higher yield results in lower liabilities and consequently lower deficits.
Clive Fortes, head of corporate consulting at Hymans Robertson, said on Wednesday the current 2 percent spread above government bonds did not reflect their AA-rating.
Accountancy firm Deloitte in October last year said it was advising some pension fund clients to base calculations of future pension payments only on corporate bond yields of non-financial institutions to reflect their true values.
Hymans’ Fortes said: “In the coming months, it will be interesting to see if scheme trustees ask their sponsors for more cash to fund deficits - and whether this has a negative effect on UK Plc’s ability to climb out of recession.”
Hymans’ report said 40 percent of FTSE 350 companies will likely be forced to address their pension burden in 2009 either by injecting cash or cutting benefits.
Overall the consultant said the problems facing schemes are manageable and the proportion of companies likely to go insolvent as a result of its pension scheme will be a minority.
Industrials and retail sector companies have the heaviest pensions burden at present while financial companies’ pensions are in comparatively strong positions, Hymans said.
Reporting by James Molony; Editing by Jon Loades-Carter
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