Richard Jones, Principal from consulting actuaries Punter Southall comments on today's results from ITV
"The financial results for the half year ending 30th June 2009 by ITV plc demonstrate clearly the problems that a company incurs when its pension scheme (circa £2.5 billion) is greater than the market capitalization of the company (circa £1.6 billion).
"Despite management pumping in £31 million of ITV’s precious cash into the scheme over the past six months in an attempt to plug the funding gap the shortfall in the scheme ballooned from £178 million as at 31st December 2008 to £538 million as at 30th June 2009.
"The increase in the deficit over the six months was equivalent to around eight times the earnings before interest, tax, depreciation and amortization (“EBITDA”) that ITV earned over the six month period.
"The key driver of the increased deficit was rising long term inflation expectations in financial markets. Rising inflation expectations increases the expected amount of benefits that the scheme will pay to members in the future and is a cost borne by the company. Inflation expectations rose from 3% to 3 ½% per annum over the past six months. Given that the ITV pension scheme has a duration of 15 years such a change could have increased the cost of the benefits payable by up to 7.5%.
"The other factor that ITV cite for the worsening funding position is that the assets in the scheme have underperformed expectations. ITV have taken a substantial portion of the risk out of their scheme by investing around 60% of the money in lower risk bond assets. However around 35% of the assets are invested in equities and property assets. Equities were broadly flat over the six months and commercial property continued to fall with the impact that the overall asset portfolio failed to generate the investment returns required to pay off the benefits without the deficit increasing each year (circa 6 – 6.5% per annum).
"The credit spreads on AA corporate bonds that are used to calculate the funding position for accounting purposes (as disclosed in the results from ITV) are still at relatively high levels compared to historic data. The bad news for ITV therefore may not be over if the credit spreads normalize then the deficit could get even worse.
"The big challenge for ITV will arise if the funding position does not improve by 1st January 2010 or 1st January 2011 when the next triennial valuations of the various sections of the ITV scheme are due. These will set contributions that ITV will have to pay into the scheme for the following three years and, if the deficit persists at the current high level, cash contributions will have to increase dramatically.
"ITV seem to be managing their scheme pro-actively, as witnessed by the revelations earlier in the week of a project to offer ITV pensioners alternative pension benefits, but with the pension scheme deficit so large the only ways that the deficit is going to be seriously reduced is through additional cash contributions from ITV or excess performance on the equity and property assets.
"All other things being equal a return of equity indices to their highs in 1999/2000 would eliminate the majority of the deficit in the scheme so all is not lost but it is likely that ITV will have to continue paying substantial sums into its pension scheme for the foreseeable future."
Ends
For further information or to speak with Richard Jones please contact:
Penrose Financial
Roman Townsend
020 7786 4875
Trustee training - Pension scheme investment (September 2010)
