FTSE 100 defined benefit pension schemes enjoy deficit drop

FTSE 100 defined benefit pension schemes enjoy deficit drop

Favourable market conditions and significant sponsor contributions helped drive a 32% reduction in the estimated FTSE 100 defined benefit pension scheme deficit over the year to the end of June 2017, according to JLT Employee Benefits.

In aggregate, FTSE 100 scheme portfolios fared better against a rising market backdrop, particularly those continuing to run very large mismatched equity positions, JLT reported in its quarterly outlook.

The average scheme asset allocation to bonds rose to 63% from 61% the previous year, indicating that investment mismatching persists across some of the UK’s largest schemes.

UK blue chip sponsors continued to pay significant contributions to offset their pension scheme deficits. More than half reported significant deficit funding contributions in their most recent annual report and accounts.

Total contributions during the period increased 65% to £10.8 billion, up from £6.4 billion the previous year, but this increase was largely attributable to activity among a small number of schemes.

Despite some progress in the aggregate funding position, total disclosed pension liabilities rose 21% to £710 billion, from £586 billion, over the 12-month period.

Low interest rates, increasing life expectancy and aggressive regulation have contributed to spiralling pension liabilities over recent years, JLT said, prompting successive sponsors to withdraw defined benefit provision and close schemes to future accrual. Fewer than one fifth of FTSE 100 companies (19) are still providing defined benefits to a significant number of employees.

The distribution of liabilities across index constituents remains uneven. At one end of the scale, 17 companies—large, legacy businesses—have disclosed pension liabilities of more than £10 billion, while at the other end, nine companies—typically more recent additions to the index—are free of defined benefit obligations, reporting no liabilities.

Total deficit contributions continued to be dwarfed by dividends declared across the index. According to JLT, 42 companies could have settled their pension deficits in full, with a payment of up to one year’s dividend.

The tension inherent between fund scheme deficits, delivering shareholder value and holistic covenant strength has been brought into sharp focus over recent months by the high-profile collapse of Carillion and BHS.

The high ratio of total dividends paid versus the total disclosed scheme deficit—£73 billion of dividends relative to a deficit of £43 billion, a ratio of 1.7x—highlights the missed opportunity for sponsors to substantially pay down their deficit and contribute towards further de-risking measures.

Charles Cowling, director at JLT Employee Benefits, said: “Market conditions have certainly been more helpful to scheme portfolios over the past year, with strong equity market returns providing a much-needed boost to investment performance. Sponsors too, in some cases, have stepped up to the mark and taken the decision to inject cash into their schemes as part of their wider approach to managing balance sheet risks.”

“That said, while it is positive to see a reduction in sponsors’ total disclosed deficit, it is important to emphasise that this number masks the materially worse funding position likely to be reported by upcoming actuarial valuations.”

Cowling continued: “More broadly, progress has not been universal across FTSE 100 pension schemes and remains the story of the few rather than the many. While a number of scheme sponsors are acutely aware of the risks and have taken steps to address looming liabilities and deficits, too many are burying their heads in the sand and continuing to prioritise the short-term needs of shareholders over their long-term obligations to scheme members and, arguably, the underlying health of their business.”

“Increasingly, our analysis highlights the contrast between the new world and an old economy, particularly in sectors already under the pressures of wider structural change—retail, banking, telecoms to name but a few. Looking ahead, legacy businesses who fail to tackle the mounting risks in their schemes may struggle to compete with newer, more agile market entrants, unencumbered by defined benefit pressures.”


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