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Pension costs and liabilities for UK-regulated utilities1

Published online by Cambridge University Press:  18 May 2011

GORDON HUGHES
GORDON HUGHES*
Affiliation:
Department of Economics, University of Edinburgh, 31 Buccleuch Place, Edinburgh EH8 9JT, UK
*
(e-mail: [email protected])
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Abstract

This paper argues that a substantial portion of the risks associated with the defined benefit (DB) pension schemes operated by regulated utilities in the UK will, in practice, fall on customers via the tariffs that they pay for regulated goods and services. It examines the assumptions made by regulated companies in their FRS 17 valuations. These assumptions generate parameters that systematically understate both the present value of pension liabilities and current service costs. These are re-estimated using the risk-free real rate of discount and compatible assumptions. On this basis, the total pension deficit for the sample increased from £12.7 billion to £56.3 billion in 2009, equivalent to about 110% of regulated revenues. Further, the cost of current service for 2008–09 was 20% higher than total contributions in the year, despite large top-up contributions. If contributions were increased to cover current service costs and to eliminate pension deficits over a period of 10 years, the additional contributions would amount to 235% of actual contributions or 13% of regulated revenues implying a significant increase in regulated charges. Companies in the communications and transport sectors face the largest adjustments in addressing the problems of underfunded pension schemes.

Type
Issues and Policy
Information
Journal of Pension Economics & Finance , Volume 11 , Issue 1 , January 2012 , pp. 89 - 117
Copyright
Copyright © Cambridge University Press 2011

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Footnotes

1

This paper was originally prepared for a workshop organised by the Regulatory Policy Institute in March 2009. I am grateful to participants at the workshop and a seminar at Cranfield School of Management plus a referee for this Journal for comments on earlier versions of the paper. The views expressed in the paper are strictly those of the author and do not reflect the collective position of any organisation.

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