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MARKET COMMENT
By
Are you worried about the ever-increasing size of the pension black hole at Britain's top businesses? According to the actuaries Lane Clark & Peacock, the pension deficit of the FTSE 100 companies has doubled over the past year to £55b. Others have suggested that the hole could be considerably larger. The CBI, for example, has calculated that the pension deficit to be closer to £160b than £55b. Whether it is £55b or £160b is, to some extent, immaterial. These are still very large sums of money. Furthermore, this cavity needs to be filled somehow if the various company pension schemes are to be considered fully funded. To get the scale of the problem into some perspective, £55b would be equivalent to a company the size of Royal Bank of Scotland Group (LSE: RBS)(NYSE: RBSPRK). Of course, the hole could close should stock markets rebound. This is because many of the underperforming pensions invested over half their money in shares. Lane Clark & Peacock suggest that the deficit could be erased should equities climb 40% by the end of the year. However, miracles don't happen that often and many of those FTSE 100 companies may need to divert resources from their core businesses into their pensions schemes. BP (LSE: BP), for instance, said it will be reducing its share buy-back programme and plans to pay up to £1.2b into its US pension fund. Others, that perhaps don't have the same luxury of copious cash flows, could find the pension problem much more trying. Lane Clark & Peacock has identified seven businesses whose pension deficit could threaten their finances. These are Rolls-Royce (LSE: RR.), BAE Systems (LSE: BA.), ICI (LSE: ICI)(NYSE: ICI), British Airways (LSE: BAY)(NYSE: BAB), BT Group (LSE: BT.A)(NYSE: BTY), Invensys (LSE: ISYS) and Royal & SunAlliance (LSE: RSA)(RSA). As an investor, I am concerned about the pension deficit at some of these companies, especially if they could endanger the health of the actual business. Pensions are, after all, a benefit that these companies have chosen to provide for their employees. As such, they should honour those commitments when they fall due. However, I find it hard to get too animated over the issue right now. I would instead much prefer these companies to focus on their core operations rather than to use already scarce resources for hole-plugging activities. Most companies plan to make up the shortfalls by an increase in annual contributions over several years (or even decades). That said, it is always worth keeping an eye on pension liabilities and be especially watchful of, and perhaps even avoid, those companies whose pension deficits are widening faster than actuarial expectations. Investing is hard enough without having to contend with pension issues. The writer has a beneficial interest in British Airways.