LCP’s latest annual analysis of the position of the FTSE100 pension schemes has revealed that the aggregate FTSE100 pensions surplus has grown from £10bn at the start of 2021, to £59bn at the year-end, and is currently over £100bn. This is in spite of volatile markets, and means that, for the first time in 20 years, many more companies will now have to focus attention on how to manage this pensions surplus.

In addition, the analysis revealed that FTSE100 companies are sitting on up to an additional £10 bn of pension “hidden” surplus due to the long-term impact of the pandemic on life expectancy which could result in up to a 2% fall in liabilities. This is ”hidden” because many companies are not currently recognising this impact within their corporate accounts. This year, we expect to see an increase in the number of companies making such an allowance, further improving the aggregate position.

Current high levels of inflation, as well as increases in expectations for future inflation levels, have increased pension liabilities for the FTSE100 by £40bn. However, pension scheme assets will likely offset this increase to an extent and dampen the impact on corporate balance sheets.  Indeed, many schemes will have seen assets rise more than their liabilities due to the caps on pension increases.

Other key findings in Don’t look back, are:

• Volatility in the corporate bond market over 2021 led to a 10% reduction in UK pensions liabilities for accounting purposes. Over 2022 yields have risen to over 3.0% pa, a landmark not seen since the EU referendum in mid-2016. This rise since the year end has reduced liabilities by a further 20%.
• Pension scheme investments in equities have reduced to just 15%.  This is down from over 60% 20 years ago.
• Over a quarter of FTSE100s already use some form of contingent funding mechanism to support their pension scheme. This proportion is expected to increase due to the upcoming new Funding Code as well as concerns around overfunding and efficient use of company resources.
• Nearly 40% of FTSE100 companies with DB pension schemes have insured some or all of their UK pension scheme through buy-ins, with 3i, National Grid, Smiths Group, Melrose Industries, Phoenix Group and Reckitt Benckiser all reporting new buy-ins within their 2021 accounts.
• Executive pension contributions for FTSE100s continue to fall, with the average reducing from 17% to 14% of pay. The number of FTSE 100 CEOs receiving pension contributions of 25% or more of basic salary has fallen from 40 in 2019 to just 11 in 2021.

Author of the report, Jonathan Griffith, commented: “At first glance, the takeaway from this year’s report is that this is job done and FTSE100 pension schemes are now an asset for UK Plc. Whilst it’s clearly good news that more schemes are now in surplus, with rising inflation, a potential recession and a new funding code on the horizon, scheme sponsors need to make sure that they understand how much of a surplus they really have, how to manage it, and think about how they best buffer their schemes against the headwinds to come.”