Britain's largest firms have paid £150bn into their defined benefit schemes over the past 10 years but their accounting position has worsened.
In that time the net accounting position of these DB schemes has gone from a £12bn surplus to a £17bn deficit despite this money being paid in.
The main factor in the ballooning deficits of these FTSE 100 companies has been the continued rise in liability values, driven by falls in bond yields, says LCP in its 24th annual accounting for pensions report released today.
There was some relief with the combined FTSE 100 accounting deficit for UK pension liabilities improving from the £46bn disclosed in last year’s report due to strong returns on assets and a record level of contributions, with FTSE 100 companies paying a total of £17.3bn to their DB schemes in 2016.
Bob Scott, LCP’s senior partner and author of the report, said: “The fall in bond yields over the last 10 years has led to a sustained rise in liability values, more than 85 per cent since 2007, meaning companies have effectively paid £150bn to go backwards.
"Companies remain under increasing pressure to pay more into their schemes, and one can only hope that the contributions companies pay in future will have a bigger impact on the pensions deficit than in recent years.”
This year’s report also found that while total pensions liabilities lie at £625bn, FTSE100 companies were still able to pay four times as much in dividends in 2016 as they did in contributions.
But Mr Scott said: "Looking just at companies with 31 December year-ends, 39 declared pensions deficits totalling £37bn. Those same companies paid out £39bn in dividends during 2016."
Although FTSE100 companies would generally be expected to be able to fund their pension promises, the issue of “stressed schemes”, where benefits may not be paid in full, remained a key concern particulaly following high-profile cases such as Tata Steel, Hoover and BHS.
“All signs are that The Pensions Regulator will get tougher with companies who unduly prioritise their shareholders, by giving them a bigger slice of the cake than the pension scheme gets,” Mr Scott added.
The three FTSE 100 companies with the largest pension scheme deficits in 2016 were Royal Dutch Shell, with a deficit of £6.9bn, BP, with one of £6.7bn and BT Group with a deficit of £6.3bn.
Companies could be required to disclose even higher amounts on their balance sheets if the International Accounting Standards Board (IASB) pushes ahead with planned amendments to IFRIC14, which governs the way companies are required to interpret the pensions accounting standard.
Mr Scott warned: “Record levels of paid contributions and strong asset returns may have improved the overall accounting deficit figure, but this reduction could be short lived. In particular, if the IASB persists with planned amendments to IFRIC 14, this could mean companies are required to disclose even larger pension liabilities on their balance sheets”.
Companies face increased costs , including the national living wage, the apprenticeship levy and, for those who have been paying minimum auto-enrolment contributions, an increase from 1 per cent to 3 per cent over the next two years in the required rate. Against this background, it is not surprising that UK companies continue to close their pension schemes to future accrual says the report.
There are currently just four FTSE 100 companies that provide some form of defined benefit pension provision as standard to new recruits: Croda International, which provides a career average revalued earrings scheme, and Diageo, Johnson Matthey and Morrisons, which all provide cash balance schemes.
stephanie.hawthorne@ft.com
