FTSE 100 companies have increased contributions to their defined benefit (DB) pension schemes by 65 per cent higher year-on--year at the end of last summer, a report by JLT Employee Benefits shows, as they seek to plug their deficits.
According to the research, more than half of FTSE firms reported significant deficit funding contributions in their most recent annual report and accounts.
However, this increase was largely attributable to activity by a small number of schemes, which increased the value of its contributions when compared to the previous year.
This hike in inflows into the pensions schemes - £10.8bn - alongside favourable market conditions, helped drive a 32 per cent reduction in the estimated pension deficits of these companies in the first six months of 2017, JLT said.
However, total disclosed pension liabilities rose 21 per cent to £710bn, over the 12-month period.
Low interest rates, increasing life expectancy and aggressive regulation have contributed to spiralling pension liabilities over recent years, prompting successive sponsors to withdraw DB provision and close schemes to future accrual.
Only 19 FTSE 100 companies are still providing DB benefits to a significant number of employees.
Tesco closed its DB scheme in 2016, and BT announced a similar move last week.
JLT warned that total deficit contributions continued to be dwarfed by dividends declared across the index, since 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.
According to JLT the ratio of total dividends paid versus the total disclosed scheme deficit - £73bn of dividends relative to a deficit of £43bn – is at 1.7 times.
This “highlights the missed opportunity for sponsors to substantially pay down their deficit and contribute towards further de-risking measures,” the firm said.
According to Charles Cowling, director at JLT Employee Benefits, “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”.
He said: “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 DB pressures.”
maria.espadinha@ft.com
