FTSE 100
companies pay five times more in dividends than pension contributions

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According to LCP’s annual Accounting for Pensions report – out today – the combined pension deficit of the 56 companies in the FTSE 100 that disclosed a deficit at their 2015 year-end was £42.3bn. Those same companies paid dividends totalling £53.0bn, some 25% higher.

The LCP report, which is in its 23rd year and looks at how FTSE 100 companies are managing their pension risks, found that FTSE 100 companies pay around five times as much in dividends as they do in contributions to their defined benefit pension schemes.

Bob Scott, LCP’s senior partner and report author, said: “The collapse of BHS and the potential sale of Tata Steel UK, both with underfunded pension schemes, have highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company. Companies with large deficits may see pressure from the Pensions Regulator on their dividend policy in light of the Select Committee’s report into BHS.”

The LCP report – which can be accessed from here – also found that FTSE 100 companies are putting more than twice as much money into defined benefit (DB) pensions as they are into defined contribution (DC) pensions - £13.3bn compared with £6.0bn – and this gap has grown in recent years.

“The increasing cost of DB pension provision has meant that more contributions went towards additional pension accrual than in any year since 2009,” said Bob Scott. “This is despite the significant number of DB scheme closures, and a material reduction in the number of employees accruing DB pensions. Not only is this a drag on company performance and the wider UK economy, but the relatively small contributions going into DC may be storing up problems for the beneficiaries of those schemes when they come to retire.”

One way of cutting pension scheme deficits is by reducing the level of increases that schemes are obliged to provide – this was a significant part of the government consultation into the British Steel Pension Scheme.

According to LCP, allowing companies to alter the increases applying in their pension scheme to the Consumer Price Index (CPI) would reduce FTSE 100 pension liabilities by around £30bn. If companies had only to provide the minimum level of pension increase set out in legislation, FTSE 100 pension liabilities would be reduced by up to £100bn.

“The government should end the uncertainty – the legal lottery – by allowing companies to move from RPI to CPI, subject to safeguards,” said Bob Scott. “The safeguards are important as they should not automatically allow a profitable company with a large pension surplus to increase that surplus by reducing benefits. They could, however, provide relief to a company with a large deficit where the trustees agreed it was in the members’ interests for benefits to be reduced.”

Following the recent cut in base rate and the extension of the QE programme, pension scheme deficits have increased. By 9 August, LCP estimate that FTSE 100 companies had pension deficits totalling £63bn, up from £46bn at the end of July.

The LCP report found the average FTSE 100 company’s pension liability to be 34% of its market capitalisation and its pension scheme deficit to be 4% of its market capitalisation.

Download the Accounting for Pensions 2016 report here