Lonmin becomes first blue chip to offload its final salary scheme

Lonmin becomes first blue chip to offload its final salary scheme

Mining company Lonmin yesterday became the first FTSE 100 company to offload its final salary pension to a private insurance firm, as a report revealed the sharply rising costs to employers of providing guaranteed pensions for staff.

Lonmin, which last week revealed a jump in six-month profits to £200m, has told its staff in Britain their retirement incomes will be paid by specialist pension fund insurer Paternoster following the transfer of its £78m UK fund.

Paternoster said it would manage the accumulated final salary benefits of staff and assume the risks previously borne by the mining firm.

A report by actuaries Mercer Human Resource Consulting said the pension liabilities of Britain's top 350 companies increased by £8bn as they raised their life expectancy assumptions by an average of six months.

A basic rule of thumb in the pensions industry is that an increase in life expectancy of one year increases the cost of running a final salary scheme by 4%. Firms are under pressure from the regulator to increase the expected longevity of a male employee retiring at 65 from 86 to 89.

So far, the rise in liabilities resulting from increasing life expectancy has been offset by a steady rise in global share prices over the past three years and increases in corporate bond yields, which make it cheaper to provide annuities.

Mercer said FTSE 350 schemes were currently showing a surplus of £14bn. However, corporate.....continued below

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bond yields are expected to fall back towards the end of the year, heaping further costs on sponsoring employers.

A report by actuaries Lane Clark & Peacock last week revealed that at least 10 FTSE 100 companies were in discussions to offload their final salary schemes to insurers. It said the market for pension buy-outs would double in value to £10bn as companies sought to offload their funds ahead of further rises in costs and increased regulation.

Mercer spokesman John Hawkins said schemes looked healthy under existing accounting rules, but expected changes would make the situation worse.

"The true picture may be less rosy. On some measures the corporate bond yield increase is less significant, and the position is vulnerable to a re-rating of corporate bonds and a reduction in credit spreads as confidence and liquidity recovers."

He said further improvements in life expectancy were still anticipated. Also, employers' contribution rates were determined by actuarial calculations, not accounting rules. Actuarial assumptions put many firms in deficit that, under accounting rules, were in surplus, pushing up contribution rates. The result would be further pressure on companies to offload their schemes.

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