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FTSE 100 companies are failing to provide their investors with information on the risks in their pension schemes, according to new research from The University of Nottingham. The news comes as the total pension liabilities of FTSE 100 companies reach £409 billion with deficits of over £53 billion.
The Centre for Risk and Insurance Studies, part of the Nottingham University Business School, collaborated with researchers from Aston University on the report, which was commissioned by the Institute of Chartered Accountants of Scotland (ICAS). It warns that investors face further pension surprises as just 10 of the FTSE 100 companies disclosed the sensitivities of their final salary pension schemes' liabilities, as recommended in the Accounting Standards Board's guidelines.
Pension risk is highlighted when a fund is in deficit. The main reasons behind a shortfall are market-driven asset price volatility, increased life expectancy of individuals leading to increased liabilities, and a disparity between the duration of assets in relation to the liability. The liability is valued according to a number of key actuarial assumptions — including future price inflation rates, salary inflation and life expectancy.
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Financial risk variables are very sensitive. One FTSE 100 firm reported that a one-year increase in life expectancy can add anything up to a £1.3 billion increase on the pension liability. However, only half of firms disclosed the effect of a change in life expectancy on the pension scheme's liabilities.
Chris O'Brien, Director of the Centre for Risk and Insurance Studies at the Nottingham University Business School, said: “The current International Accounting Standards Board (IASB) proposals do not require firms to disclose how the net position of pension schemes — taking into account both assets and liabilities — would be affected by changes such as interest rates or share prices.
“With more companies using assets over cash contributions to plug gaps in their pension schemes, the report makes recommendations to include this area in guidelines, to assist in understanding the level of risk exposure from different investment strategies.”
David Wood, Executive Director of Technical Policy at ICAS, commented: “By failing to disclose risks associated with pension schemes in their annual reports, FTSE 100 companies are not alerting users to the potential future changes in surpluses or deficits.
“This creates difficulty for investors and shareholders who want to understand the overall scale and timing of the potential pension risks faced by companies. The shroud of secrecy around pension risks needs to be lifted in order to improve the quality of information to investors and to help understand future cash flow risks to companies.”
He adds: “The IASB has proposed that some risk disclosures be mandatory in annual reports. If we are to improve understanding of company pension problems, it is vital that the IASB's proposals are extended to include further disclosures recommended in our report.”
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Notes to editors: The University of Nottingham is ranked in the UK's Top 10 and the World's Top 100 universities by the Shanghai Jiao Tong (SJTU) and Times Higher (THE) World University Rankings.
More than 90 per cent of research at The University of Nottingham is of international quality, according to RAE 2008, with almost 60 per cent of all research defined as ‘world-leading’ or ‘internationally excellent’. Research Fortnight analysis of RAE 2008 ranks the University 7th in the UK by research power. In 27 subject areas, the University features in the UK Top Ten, with 14 of those in the Top Five.
The University provides innovative and top quality teaching, undertakes world-changing research, and attracts talented staff and students from 150 nations. Described by The Times as Britain's “only truly global university”, it has invested continuously in award-winning campuses in the United Kingdom, China and Malaysia. Twice since 2003 its research and teaching academics have won Nobel Prizes. The University has won the Queen's Award for Enterprise in both 2006 (International Trade) and 2007 (Innovation — School of Pharmacy), and was named ‘Entrepreneurial University of the Year’ at the Times Higher Education Awards 2008.
Nottingham was designated as a Science City in 2005 in recognition of its rich scientific heritage, industrial base and role as a leading research centre. Nottingham has since embarked on a wide range of business, property, knowledge transfer and educational initiatives (www.science-city.co.uk) in order to build on its growing reputation as an international centre of scientific excellence. The University of Nottingham is a partner in Nottingham: the Science City.) in order to build on its growing reputation as an international centre of scientific excellence.