26 May 2020
The pension schemes of FTSE 100 companies were in their best position for 20 years at the start of the COVID-19 crisis, according to LCP’s latest Accounting for Pensions (AfP) report. The report provides an in-depth analysis of the pension information contained in the 2019 annual accounts of each of the FTSE 100 companies, as well as commentary on what has happened since the start of 2020.
The report, which focuses on the pensions balance sheet position disclosed in company accounts, rather than the funding position which determines the cash contributions payable to the scheme, found that:
- When these companies filed their 2019 accounts, 60% reported an accounting surplus in their pension scheme as measured on an IAS19 basis;
- LCP estimates that by the end of March 2020 and the start of the COVID-19 crisis, 70% were in surplus and combined were in their best position for 20 years;
- Just a month later, at the end of April 2020, the proportion of FTSE 100 schemes with an accounting surplus had fallen back to below 60%;
- In some cases, accounting deficits fluctuated wildly after the start of the crisis. In just 8 days from 10 March to 18 March this year, pension scheme liabilities on an accounting basis dropped by £150 bn due to a dramatic increase in discount rates. On the asset side, most asset classes saw large drops in Q1 with the principal exception of government bonds as investor demand for ‘safe’ assets increased;
- Whilst the crisis has created serious turbulence for many of the companies in the FTSE 100, the impact on their pension deficits would have been more muted. This is because their combined pension asset holdings are 60% in bonds and only 20% in equities, one of the asset classes that has been hardest hit by the virus. The impact on pension funds will also have been much reduced where liabilities were extensively hedged.
- The impact of the crisis on long-term changes in mortality rates, and the potential knock-on effect on pension scheme finances is unclear at this stage.
- The crisis has led to the postponement of wide ranging regulatory and legislative pension reform involving new powers for the pensions regulator and schemes setting long term funding and investment targets, which would have marked the biggest overhaul in pensions governance in 25 years.
The report also found that:
- FTSE 100 pension schemes that reported pension fund deficits in their annual accounts paid £30bn in dividends to shareholders and £5bn of contributions into their DB schemes in 2019. 60% of companies were in surplus and paid around £8bn of contributions into their schemes.
- Between 2018 and 2019, the average pension contribution for FTSE100 CEOs fell from 25% to 20% of basic salary following new ‘name and shame’ rules from the Investment Association. The ratio of CEO to average staff contributions fell from four times to three times.
- Companies are starting to adopt revised inflation assumptions in light of proposed RPI reform. The report highlights that there have been small changes in both disclosed RPI and CPI inflation assumptions although there remains uncertainty around the exact impact of RPI reform.
Jonathan Griffith, partner at LCP and co-author of the report, commented:
“Before the economic earthquake of COVID-19, a large number of FTSE 100 pension schemes were in a relatively healthy position finally reaching calmer shores following the financial crisis of 2008, with most reporting a surplus in their company accounts. The pandemic has thrown all this up in the air as discount rates and asset values are impacted by the market volatility.
Helen Draper, partner at LCP and co-author of the report, added:
“FTSE 100 companies have also been responding to pressure around the pension packages of top executives. The overall generosity of CEO pension packages has been reduced and the gap between CEO pensions and those of typical workers has also come down. But there is still a long way to go before the pension provision for those at the top and bottom of most FTSE 100 companies comes into alignment."