Defined Benefit  

FTSE 100 pension liabilities up 17%

FTSE 100 pension liabilities up 17%

The total pension liabilities of FTSE 100 companies hiked 17 per cent in the last 12 months, increasing from £584bn to £705bn, despite a significant cut in their defined benefit scheme costs, data from JLT Employee Benefits shows.

According to the research, 17 companies have disclosed pension liabilities of more than £10bn, the largest of which is Royal Dutch Shell, with £73bn.

A total of 20 companies have less than £100 million, of which 11 companies have no DB pension liabilities.

From the total universe, 11 firms have total disclosed pension liabilities greater than their equity market value as at 31 March 2017, JLT said.

This figure is almost double of the equity market value for International Airlines Group, BT and Sainsbury’s.

Nevertheless, only 19 companies in FTSE 100 still provide defined benefits to a significant number of employees.

According to Charles Cowling, director at JLT Employee Benefits, "it is sad to see that we are now witnessing the final demise of DB pension schemes in the UK – at least in the private sector".

He said: "They have simply become too expensive as an employee benefit.

"A typical final salary pension scheme now costs employers more than three times the cost of 30 years’ ago, largely as a result of increased longevity and changing market conditions.

"A defined benefit pension scheme that might have had an employer cost of 10 to 15 per cent of payroll in the late 1980s now costs the same employer well over 40 per cent of payroll – and that is before any allowance for the costs of paying for large deficits."

Looking at the top 10 companies with the highest ongoing defined benefit service costs, nine out of 10 have significantly cut back their DB service costs, the research showed.

Tesco closed its DB scheme in 2016, and BP has cut back its costs significantly, followed closely by BAE Systems, and Royal Bank of Scotland, JLT reported.

Mr Cowling said: "These costs come up for debate and negotiation at the time of each triennial actuarial valuation.

"In previous cycles, it has been the smaller schemes that closed the door on future DB benefits for all their members. Now it is the last few massive DB schemes that are closing down."

This is the case of Royal Mail, which is now looking to create a hybrid pension scheme, and of Universities Superannuation Scheme (USS), the biggest private DB plan in the country, which is currently in talks with workers to close its scheme.

According to Nathan Long, senior pension analyst at Hargreaves Lansdown, "the big increases in the liabilities is primarily down to the cost of providing guaranteed income increasing during the period covered by the report".

He said: “It acts as a reminder that the yield on longer dated gilts moving forward will continue to exert influence on final salary pension schemes.”

maria.espadinha@ft.com