FTSE 100 companies make record pension scheme contributions LCP survey reveals
4 August 2010

The report, published today, reveals that FTSE 100 companies paid an unprecedented £17.5 billion into their defined benefit schemes in 2009, 50% more than the previous year.

The influx helped drive the aggregate FTSE 100 pensions deficit down to £51 billion, nearly half the record £96 billion of a year earlier. Increases in asset values following strong investment returns were another factor behind the lower deficit.

The largest contribution was by Royal Dutch Shell at £3.3 billion, up more than £2.5 billion on contributions paid over the previous year. Lloyds Banking Group, Royal Bank of Scotland and Unilever also paid more than £1 billion into their defined benefit schemes. Eight companies - BAE Systems, British Airways, Invensys, Lloyds Banking Group, Morrisons, Rolls-Royce, Serco and Wolseley - all paid more to their pension schemes than they did to their shareholders in dividends.

The report shows that an increasing number of companies are using alternatives to cash funding as a way of bridging the gap between the amounts demanded by trustees and the sums that companies are willing and able to pay. Examples include Diageo using maturing whisky as collateral, and M&S, Sainsbury's, Tesco and Whitbread using property transactions.

Bob Scott, partner at LCP, said: "In the wake of the financial crisis, pension scheme trustees have sought more money from their sponsoring companies to fund soaring pension deficits, leading to a record level of contributions last year. While this is reassuring for scheme members, such increases in contributions reduce the scope for companies to pay dividends and to invest in their businesses."

"We have already seen a number of companies modifying their schemes to reduce ongoing pension costs - in some cases closing their schemes altogether - and this trend may be accelerated from 2012 as it becomes compulsory for companies to enrol all employees in a pension scheme and to offer a minimum level of contribution or benefit accrual."

Other key findings of LCP's Accounting for Pensions 2010 report include:

• Higher market inflation assumptions have increased pension scheme liabilities by £12 billion for those companies reporting as at 31 December 2009
• The UK Government's recent announcement that pensions indexation would switch from RPI (retail prices index) to CPI (consumer prices index) in future could have reduced the FTSE 100 deficit at the end of June 2010 by as much as £30 billion.
• Companies have again upped their assumptions of how long pension scheme members will live, adding another £9 billion to balance sheet liabilities as at the end of June.
• The move away from defined benefit schemes has continued as companies seek to limit costs and to close off their exposure to pension risks. Nearly a quarter of FTSE 100 companies have announced changes to their defined benefit pension schemes, in many cases reducing or freezing benefits, since the beginning of 2009.
• Many companies may be paying insufficient attention to their pension risks. LCP found that 32 companies neither made reference to pension risk nor reported taking any steps to reduce it in their 2009 accounts.
• Some companies, however, have sought to reduce their pension risks by switching their pension scheme assets out of equities and into bonds, or by transferring all or part of their liabilities to an insurance company via a buy-in, buy-out or longevity swap.

Bob Scott added: "Pension policy in the private sector is now driven almost exclusively by financial considerations, which is understandable given the sums involved. However, such considerations largely ignore the social consequences of having large numbers of people accruing inadequate retirement provision. Put simply, it is unlikely that the benefits emerging from the defined contribution schemes that have been set up to replace defined benefit schemes in recent years will deliver adequate benefits."