While the pensions problem is hardly a secret, the seriousness of the issue was highlighted last month when both Wincanton and Salvesen revealed that they still have large deficits in their funds.
Despite shovelling money into its fund, Wincanton said it is still looking at a deficit of about £70m. Salvesen revealed a similar figure. TDG, which reported earlier in the year, said its deficit was about £40m. And these are just three companies of many that have this problem to deal with.
The deficits have arisen in defined benefits (final salary) schemes as a result of a number of factors – for example they have had to take account of the fact the people are living longer while stocks and shares have not provided the returns expected in recent years.
And, while the issue can and is being managed, it is inevitably swallowing up time and resources for an industry that is seeing its margins under increasing pressure.
Wincanton said an up-front injection of £40m in cash to address the past service deficit of the fund has been agreed with the pension scheme trustees.
“Incremental annual cash contributions to further address the deficit, up from £2m per annum to £8m per annum, have also been agreed. £17m of the up-front contribution was paid prior to the 2005/06 year end and the balance of the payment was made early in the new financial year.
The group expects the after-tax cost of the up-front contribution to be substantially covered by the proceeds of its programme of disposal of surplus properties. Following the up-front cash injection, and subject to satisfactory completion of the employee consultation process, it expects the actuarial deficit of the pension scheme to be approximately £70m.
The rate at which the deficit has grown is highlighted by the fact that at 31 March 2002 it stood at £15m.
Wincanton said the main reasons for the increase were investment performance, lower bond yields and a change in assumptions to reflect increased longevity.
“On an IAS 19 basis the pension fund deficit of the scheme at 31 March 2006 was £116.3m. Taking account of the up-front contributions made just prior to and immediately after the year end and the scheme changes currently subject to employee consultation, this deficit would have been reduced to approximately £73m.
“Very careful consideration has been given to the appropriate measures required to respond to the growth in the past service deficit and the costs of future service accrual. It is believed that both the steps being implemented and those which remain subject to consultation, which are facilitated by the strong cash flow generation of the group, will address the deficit prudently and progressively,” Wincanton said.
Christian Salvesen operates a number of pension schemes involving defined benefit and defined contribution schemes. It said the total pension cost was £12.2m compared with £13.3m in 2005 of which £6.6m (2005: £7.9m) related to the UK defined benefit scheme.
“An actuarial loss of £10.7m (2005: gain £1.2m) has been charged in the consolidated statement of changes in equity. This principally arises due to extended mortality assumptions.”
The total value of the fund in 2006 was £226.7m compared with £182.1m but the value of fund obligations was £299.6m – up from £244.6m last year. That leaves a gap of £72.9m – up from £62.5m. During the year Salvesen paid some £6.9m into the pension fund.
TDG contributed some £9.8m to its pension fund during the year but said the value of its assets was £311.5m compared with £260.8m the year before. Its obligations had also gone up over the year – from £306.1m to £352.2m leaving a gap of £40.7m (45.3m in 2004).
It’s not all doom and gloom – equities have generally performed well and both Salvesen and TDG reported higher returns on assets than expected.
However, it seems clear that such funds will need extra support for some time to come – an additional financial pressure on an industry that is working on ever thinner margins.