Incoming changes to IFRIC 14 rules and increased pressure on companies to accelerate contributions could worsen FTSE 100 balance sheets by up to £100bn, with more than a quarter being hit to the tune of £1bn, according to the latest edition of LCP’s landmark AfP report . With the Pensions Regulator pushing employers to ‘mend the roof while the sun’s shining’, the ability to pay dividends or raise capital may be at risk for some and we could see increased regulatory capital requirements in the financial sector.

The report – now in its 26^th year – also acknowledges the current spotlight on the audit market. A complete overhaul of the audit sector is likely, with a new Independent Regulator, the Audit, Reporting and Governance Authority (ARGA). In addition, the Competition & Markets Authority (CMA) is proposing tough new measures. Together, these could bring more focus on how pension figures are audited and on an auditor’s role in cases where companies have become insolvent.

Other key findings of this year’s report include:

• FTSE 100 companies have continued to pay more in shareholder dividends than pension contributions, paying around £90bn in dividends, seven times more than the £13bn paid to pension schemes. This increase from 2017 (when dividends were six times contributions) is due to higher dividend payments, rather than a drop in contributions
• Somewhat controversially, FTSE 100 companies on average provided their CEOs with pension contributions worth 25% of basic pay in 2018, despite pressure to bring executive pensions into greater alignment with those of the wider workforce
• In line with wider de-risking trends and as the appetite for pension risk continues to fall, FTSE 100 companies have moved away from equities in favour of other asset classes. For the first time, less than 20% of their pension assets are now in equity holdings
• Although the average estimated cost of correcting historic gender inequality in “GMP” benefits of 0.4% in liabilities or £1.3bn in total is considerably lower than forecasts made before the Lloyds judgment, six FTSE 100 companies still took a hit to profits of £100m or more
• Potential RPI reform could change funding positions by up to 20%, in some cases a 20% improvement, in others, a 20% deterioration
• Longevity assumptions have reduced life expectancies and in turn, IAS 19 liabilities. This, coupled with the increasing number of parameters determining life expectancy outlooks, has made judgemental assumptions even more difficult for company directors

Phil Cuddeford, LCP partner and lead author of the report, commented:  “Last year saw FTSE 100 companies in pensions accounting surplus throughout the whole year – for the first time in two decades. This is clearly good news. Large contributions and de-risking activity mean that member benefits are safer and more likely to be paid.”

 “The FTSE 100 and the wider pensions industry will also have been relieved that the financial impact of GMP equalisation was significantly less than previously predicted. Despite this, it seems as if FTSE 100 balance sheets aren’t out of the woods just yet. With the regulator focusing on risk management and longer-term thinking, companies should be proactive in implementing long-term strategies if they are to meet the incoming regulatory requirements in the updated DB funding code, due to be consulted on later this year.”

The report also highlights the furore around executive pensions. Analysis of the disclosed accounts for the FTSE 100 shows average CEO contributions of around 25%. This is something that is likely to change following amendments in 2018 to the Corporate Governance Code and announcements by the Investment Association which stated that executive pension contributions should be aligned with the majority of the workforce. Currently only 15% of the FTSE 100 pay pension contributions or cash to their CEO in line with the rates paid to their workforce.

As in previous years, the report analyses contribution levels in the context of how much those companies paid out in dividends to shareholders. Over 2018, FTSE 100 companies paid around seven times more to shareholders than they paid into their DB pension schemes, an increase from paying six times more in dividends during 2017. Companies will need to strike a delicate balance when it comes to the possible tension between payment of dividends to shareholders and the payment of deficit contributions to pension schemes.

 Phil Cuddeford added: “It is critical to go beyond the single headline statistic when it comes to drawing conclusions on the contributions or dividends debate. There will be many factors to consider and certainly no one-size-fits-all answer.”