Record pension deficits could undermine the financial performance of the UK’s largest listed companies

The largest listed companies in the UK could have £2bn of their bottom lines wiped out by spiralling pension costs according to data released today.

Record low corporate bond yields – which are used to price pension pots for accounting purposes – have driven up liabilities. With asset values failing to keep up the increases in liabilities, companies are faced with taking a greater hit to their profit and loss accounts.

"An impact of over £2bn on profits is material compared with pre-tax profits of FTSE 350 companies of £84bn in 2015," said Warren Singer of actuarial consultancy Mercer, who compiled the data.

Most defined benefit pension schemes in the UK are closed to new entrants and over the last few months a number of companies – such as BMW and ITV – have sought to manage liabilities by closing schemes to further accrual. This process effectively freezes legacy liabilities and means companies start paying into defined contribution schemes instead.

Alan Baker of Mercer suggested that this is a strategy that more companies may take in the future.

"Whatever your long term view of bond yields, many employers will want to stop the current bleeding caused by spiralling defined benefit pension costs and for schemes that are still open to contributions this may well involve closing the scheme and moving to less expensive defined contribution saving plans," he said.

Nevertheless, even if schemes are closed off to future accrual, legacy liabilities remain in place and need to be managed and Mercer warned that servicing such liabilities is a costly process.

"Our analysis of current low bond yields shows that new defined benefit pension savings now typically have an accounting cost about four times higher than the cost of defined contribution retirement savings," said Singer.