CONCERN over the effects of revised mortality rate assumptions on ICI’s £8.3 billion of pension liabilities left the speciality chemicals group with one of the worst performances in a retreating FTSE 100.
Recent studies by the Government Actuary and the life insurance industry have confirmed much better than expected mortality rates among UK pensioners.
Those findings have prompted the Continuous Mortality Investigation Bureau, an industry body, to update its mortality tables for life insurers, with the update expected next year.
Given the size of ICI’s pension liabilities — some £8.3 billion, against a stock market value of £2.5 billion — Lehman Brothers yesterday suggested that any potential changes to actuarial assumptions could have a “material impact” on the value of ICI’s shares.
Although the US broker concedes that ICI has not declared the basis of its current mortality calculations, it says there is some risk that they are closer to the standards applied by most FTSE 100 companies, which are less conservative than those applied by UK life insurers in valuing annuity liabilities.
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In short, the maturity of ICI’s final salary pension fund — in which only 1,500 of its 80,000 members are currently working — has prompted Lehman to calculate a theoretical hit of £700 million to ICI’s stock market value from revised mortality assumptions. However, the uncertainty of ICI’s stance means the “downside risk” could be as low as £65 million or as high as £1.9 billion.
With the broker repeating its “underweight” advice, ICI fell 5p to 211½p. The chemicals group also suffered in the wake of a profit warning by Unilever, down 22½p at 459½p, which raised fears about the effects of weakening demand from food producers on ICI’s Quest flavourings and fragrances subsidiary. Elsewhere, Cadbury Schweppes shed 4½p at 432½p.
It was left to the oil majors to limit the damage to the FTSE 100, with gains in Shell Transport, up 5p at 422½p, and BP, 9p dearer at 528½p, on a rebound in crude helping to trim the closing deficit in the benchmark index to 11.5 at 4,579.5.
Centrica gave up 2½p at 246¼p after UBS downgraded the utility from “buy” to “neutral”, citing the 18 per cent gain in its shares this year, against the 3.5 per cent achieved by its sector peers. InterContinental Hotels firmed ½p to 646½p as optimism over its restructuring efforts prompted Citigroup to move from “hold” to “buy”.
Marks & Spencer lost 4½p at 345½p on worries over the level at which today’s tender offer will be pitched and suggestions that trading remains tough.