£150bn contributions
do little to dent FTSE 100 pension scheme deficits

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LCP’s 24th annual Accounting for Pensions report found that despite FTSE 100 companies having paid around £150 billion into their defined benefit schemes over the last 10 years, the continued rise in liability values, driven by falls in bond yields, has meant that the combined accounting position has worsened from a £12 billion surplus to a £17 billion deficit over the same period.

Nevertheless, the survey found that the combined FTSE 100 accounting deficit in respect of UK pension liabilities had improved from the figure of £46 billion disclosed in last year’s report.

The improvement in the net deficit since last year is due to strong returns on assets and a record level of contributions, with FTSE 100 companies paying a total of £17.3 billion to their defined benefit schemes in 2016. This follows £13.3 billion of contributions paid in 2015, £12.5 billion paid in 2014 and £14.8 billion paid in 2013.

Bob Scott, LCP’s senior partner and author of the report, said: “The fall in bond yields over the last 10 years has led to a sustained rise in liability values, more than 85% since 2007, meaning companies have effectively paid £150 billion to go backwards. Companies remain under increasing pressure to pay more into their schemes, and one can only hope that the contributions companies pay in future will have a bigger impact on the pensions deficit than in recent years.”

Dividend Discontent

This year’s report, ‘£150bn to go backwards’, also found that while total pensions liabilities lie at £625 billion, FTSE100 companies were still able to pay four times as much in dividends in 2016 as they did in contributions. This figure increased to more than five times the pension contributions if excluding the £4.2 billion paid by RBS to its pension scheme as a one-off contribution.

Although FTSE100 companies would generally be expected to be able to fund their pension promises, the issue of “stressed schemes”, where benefits may not be paid in full, remains a key concern specifically following high-profile cases such as Tata Steel, Hoover and BHS.

“All signs are that the Pensions Regulator will get tougher with companies who unduly prioritise their shareholders, by giving them a bigger slice of the cake than the pension scheme gets.” said Bob Scott.

Companies could be required to disclose even higher amounts on their balance sheets if the International Accounting Standards Board (IASB) pushes ahead with planned amendments to IFRIC14, which governs the way companies are required to interpret the pensions accounting standard.

“Record levels of paid contributions and strong asset returns may have improved the overall accounting deficit figure, but this reduction could be short lived.” said Bob Scott. “In particular, if the IASB persists with planned amendments to IFRIC 14, this could mean companies are required to disclose even larger pension liabilities on their balance sheets”.

Back to the Future

Following last year’s Brexit vote, the combined FTSE100 pension deficit increased to almost £80 billion at the end of August 2016 – the highest level since 2009 – before steadily reducing over the remainder of 2016 and the first half of 2017.  By the end of June 2017, the combined deficit had reduced by £29 billion from the position at 31 July 2016.

Brexit also brings uncertainty to companies, particularly those who employ staff from across the EU or who purchase goods from overseas.  Companies face increased costs from other quarters, including the national living wage, the apprenticeship levy and, for those who have been paying minimum auto-enrolment contributions, an increase from 1% to 3% over the next two years in the required rate.  Against this background, it is not surprising that UK companies continue to close their pension schemes to future accrual; and take special care to avoid unnecessarily overstating pension liabilities in their accounts.

“The full impact of Brexit, direct and indirect, on companies who sponsor defined benefit pension schemes is yet to be seen.  What we see at present is that more and more companies are paying substantial amounts to fund legacy defined benefit schemes whilst making modest contributions to their current employees’ defined contribution schemes.” said Bob Scott.

Click here to download Accounting for Pensions