Companies face a pivotal year as FTSE100 pension schemes surpluses remain strong
3 January 2023
New analysis of FTSE100 pension positions by LCP’s Pensions Explorer at 31st December 2022 shows that the combined estimated IAS19 surplus (the measure used within corporate accounts) currently stands at £130bn.
Scheme funding levels may have fallen from their record highs of the last couple of quarters, but are still standing at robust levels and have more than doubled over 2022.
Whilst some schemes were hit by reductions in hedging levels and lost out financially in the aftermath of September’s mini budget, many more have burst through funding targets and are now in the healthiest position to date.
This means that schemes need to turn their thoughts to how they will best manage and generate value from this surplus. LCP are urging scheme sponsors to be proactive and take the following three steps:
- Get an updated picture of the scheme’s funding position against long term targets. If 2022 has led to material improvements, then in many cases it will be in the interests of the business to make sure cash is not being committed directly to the pension scheme if it isn’t needed.
- Where appropriate, review required contributions and/or consider offering alternative forms of protection in the improved funding environment. This could mean making future contributions into escrow or switching contributions off when funding triggers are met.
- Re-assess the ultimate target and timescales, and the strategy for best achieving it. Sponsors, having paid substantial contributions to their pension schemes over the last two decades, should therefore look to ‘own’ how the final part of the journey is run, including proactively taking proposals to trustees rather than responding reactively.
Jonathan Griffith, Partner at LCP, commented “Whilst we are seeing funding levels dipping below the record levels over the autumn, it’s clear that for the majority there has still been a huge improvement in funding levels over 2022. This has shifted the focus for many companies towards surplus management and generating value from future pensions actions.
“Pension scheme sponsors have waited 20 years to be in the position they find themselves in today – 2023 is going to be a pivotal year for ensuring sponsors’ objectives are fully reflected throughout the next stages, whether that be achieving optimal terms on settling liabilities or running the scheme on to generate value.”