This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.
There were several noteworthy announcements in the Autumn Statement in our view, alongside the lower growth forecasts and macroeconomic shuffling. At the micro-level these announcements may impact individual equities. There are several measures that caught our attention, in particular:
- Housing
- Pension changes
- Increased relief for capital investment
- Changes to personal allowances
A Look at Potential Pension Changes
The government appears to have recognised the burden of pension regulation, and seems to be determined to ensure that defined benefit pensions regulation does not act as a brake on investment and growth. The Department for Work and Pensions (DWP) will consult on providing the pensions regulator with a new statutory objective to consider the long-term affordability of deficit recovery plans to sponsoring employers.
The government also recognises that volatility in measures of pension scheme deficits can make it hard for companies to manage their investment plans and attract external funding. DWP will also consult on whether to allow companies undergoing valuation in 2013 or later to smooth asset and liability values. We welcome these measures as pragmatic, and would suggest that the new regulatory environment around pensions could be beneficial for those companies with significant deficits. We would however temper the enthusiasm for pragmatism with ensuring that the regulator doesn’t get bullied into a situation where the ‘head in the sand approach of pension mismanagement of the past’ is resurrected, ending up with the State holding the baby (or in this case the elderly) through the inability of companies to meet their pension commitments.
However, in the short-term, there may be some companies that may well take advantage of new regulations to reduce their pension payments. Indeed we have witnessed pension-related share price improvements from Marks & Spencer Group (MKS) and others of late. The latter said that it will reduce annual funding to its pension scheme from £60 million a year to £28 million a year from 2013. The reduction has been agreed with M&S’s pension trustees after the latest triennial valuation showed a major fall in the size of the scheme’s deficit. As of March 2012, the defined benefit scheme had a deficit of £290 million, compared with £1.3 billion in March 2009. The deficit has been seen as a potential impediment to any future takeover bid for M&S because of the funding required to erase the gap. Shares in M&S rose by just over 2% on the back of the announcement on November 28, 2012.
For a well-reasoned discussion over these matters we would suggest research from Leeds University, "Accounting for Pensions", as well as a Mercer paper on pension risk management. The research from Leeds University and the joint survey from ICAEW/Mercers illustrate the tensions behind the actuarial and accounting treatment and the potential unintentional consequences for companies and hence the economy.
With pension accounting being a variable of large numbers and exogenous moving parts, we rely on JLT work for providing the data on FTSE 350 companies. The estimates are just that, with individual fund and company sponsor specifics, so these companies are listed to provide potential guidance to investors seeking to identify those names that may be impacted by any easing of the regulations.
UK Companies Ranked by Liabilities as a Percentage of Market Cap
| Market Value | Surplus Deficit % Market Cap | Liabilities as % of Market Cap | |
| International Airlines Group | 2,959 | -12% | 562% |
| Invensys | 1,605 | -27% | 340% |
| FirstGroup | 1,145 | -14% | 301% |
| Go-Ahead Group | 536 | -14% | 293% |
| BT Group | 16,417 | -15% | 250% |
| BAE Systems | 9,374 | -55% | 247% |
| Royal Bank of Scotland | 13,136 | -16% | 207% |
| Kier Group | 440 | -7% | 198% |
| Interserve | 364 | -15% | 191% |
| Dairy Crest Group | 444 | -14% | 175% |
Market value for the FTSE 250 companies taken on March 31, 2012. Market value for the FTSE 100 companies taken on June 30, 2012.
Data Source: JLT, Shore Capital Stockbrokers
The original version of this article was written by Gerard Lane, an analyst at Shore Capital. See his previous article: "Bountiful Buybacks are Beautiful".
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Shore Capital Disclaimer
The views expressed in this document accurately reflect the research analyst’s personal views about any and all of the subject securities and the Company on the date of this document. Any opinion or estimate expressed in this document is subject to change without notice. Shore Capital may act upon or use the information or a conclusion contained in this document before it is distributed to other persons. This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. None of Shore Capital Stockbrokers Limited or any member of Shore Capital, or any of its or their directors, officers, employees or agents accept any responsibility or liability whatsoever for any loss however arising from any use of this document or its contents or otherwise arising in connection therewith.
