Pensions  

UK’s biggest companies see reduction in DB pension deficits

UK’s biggest companies see reduction in DB pension deficits

The 100 biggest companies listed on the London Stock Exchange collectively saw a reduction in their defined benefit pension scheme deficits by £15m over 2015, pension consultancy Barnett Waddingham has found.

The positive result contrasted with 2014, when the pension deficit of FTSE 100 schemes grew. The research found schemes to be on average 92 per cent funded on 31 December 2015.

However, the increase in funding levels had little to do with the companies increasing their contribution rates.

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Rather, Barnett Waddingham associate Martin Hooper put the improved situation down to an increase in average discount rates - the assumed investment return used in a present value calculation of assets - which over-compensated for a decrease in actual assets under management and an increase in life expectancy.

“This significant reduction in overall deficits represents a positive development following the deterioration seen last year, and the limited improvements seen in the years before despite substantial contributions being paid to these schemes,” Mr Hooper said.

“An increase in the average discount rate has helped to reverse the rise in deficits witnessed in 2014 and this coupled with a period of stability for long-term inflation expectations has been a major factor in seeing these deficits fall.”

The average discount rate increased by 20 basis points on last year’s figures, to 3.8 per cent. Salary growth, meanwhile, fell by 10 basis points to -0.2 per cent taking inflation into account.

Life expectancy meanwhile increased by 0.1 years in 2015. The average 65-year-old male can now expect to live 23.4 years.

The average retail price index (RPI) assumption – that is, the rate at which pension schemes expect retail prices to rise – was on average 3.1 per cent, unchanged from 2015. The average consumer price index (CPI) assumption was 2.1 per cent. Most private DB schemes link annual benefit increases to RPI rather than CPI, although the government is currently reviewing this rule.

james.fernyhough@ft.com