DB deficit nearly doubles over 2016

At the end of 2016, the country's DB schemes were underfunded by £434bn. That compared with £233bn at the end of 2015.

The schemes of FTSE-listed companies fared worse than average, with FTSE 100 and 350 scheme deficits more than doubling in size over the year.

The deficits of FTSE 100 company schemes rose from £70bn at the end of 2015 to £169bn at the end of 2016.

FTSE 350 companies, meanwhile, saw their DB pension deficits rise from £81bn to £191bn over the period.

Overall, the UK's DB schemes are now 77 per cent funded, compared with 84 per cent this time last year.

Both FTSE 100 and FTSE 350 company schemes were 78 per cent funded, a 10 percentage point drop year on year. 

In calculating the deficits, JLT uses the standard accounting measure (IAS19) used in company reports and accounts.

There will be instances where the pension scheme will represent a serious threat to the company’s balance sheet and, in some cases, the company’s ability to pay dividends. Charles Cowling

This method of calculation generally yields lower results than other methods. Deficits calculated by a scheme's trustees, for example, tend to be higher than those calculated by the sponsoring employer.

Deficits calculated according to the cost of a bulk annuity buyout - that is, the cost of passing on all liabilities to a life insurer - are the highest of all, with some figures putting the total deficit above £1trn.

However, in November The Pensions Regulator executive director Andrew Warwick-Thompson downplayed such estimates, saying a more realistic deficit estimate was £350bn to £400bn.

Charles Cowling, a director at JLT Employee Benefits, pointed out that, while 2016 was a "turbulent year" for DB schemes, the end-of-year deficit was still lower than its August peak of £500bn.

But he added that year-end deficits were a record high and that there "appears to be no relief in sight for companies with large pension schemes"

“Now we have reached the all-important year-end for many companies, we are going to see many companies’ accounts showing a marked deterioration in their year-end pension numbers," he said. 

"There will be instances where the pension scheme will represent a serious threat to the company’s balance sheet and, in some cases, the company’s ability to pay dividends."

Commenting on the JLT figures, Intelligent Pensions' head of pathways Andrew Pennie the cost of matching DB liabilities looks to be "going down a one way street – in the wrong direction". 

“The sad fact is we are highly likely to see a lot of scheme closures in the coming months and years, unless the cost of funding defined benefit pensions can be made more affordable.

"One wonders whether the public sector defined benefit pension scheme will also come under similar pressures.”

The figures came two weeks after the Work and Pensions Select Committee released a report recommending a major overhaul to the DB sector, in an effort to prevent the underfunding problem from becoming a crisis.

Its recommendations included allowing struggling schemes to reduce the benefits they pay members, and increasing TPR's powers to fine employers that fail to meet their obligations.

james.fernyhough@ft.com