Defined Benefit 

FTSE 100 pension scheme risk improves

FTSE 100 pension scheme risk improves

The risk across FTSE 100 defined benefit (DB) schemes fell by almost a quarter in 2018, research showed.

This reflected positive investment returns, additional contributions and a relatively benign environment for the sponsors' covenants.

Fiduciary manager Cardano and covenant specialist Lincoln Pensions published their annual Worry Index which provides a single measure of the overall safety of the UK biggest corporate final salary plans.

The "Worry Score" fell by 23.5 percent between 2017 and 2018 to 90.6 and was at its lowest level for the past four years.

The companies started producing this index in 2015, which is considered the baseline for the measure (100).

The Worry Index measures three threats facing a DB scheme – funding risk, investment risk, and sponsor risk – and covers the 77 FTSE 100 companies with a final salary plan based on their latest financial year ending on or before 31 March 2018.

Despite the significant improvement in the pension risk position, one in eight FTSE 100 companies were still in the "Worry Zone" - with a DB pension deficit representing at least 30 per cent of market capitalisation - so were still vulnerable, particularly to a major economic shock, the firms said.

Under a stress scenario the aggregate FTSE 100 pension deficit would increase by an estimated £97bn to £284bn, leaving some companies with a pension deficit bigger than the value of their sponsor.

Risks were particularly concentrated in the consumer services industry, driven by the retail sector, which had one of the highest Worry Scores of any FTSE industry along with capital-intensive industries such as telecoms, oil & gas, utilities and industrials.

In the past year, tougher trading conditions had claimed a number of high street brands.

Several retailers had discussions with the Pension Protection Fund (PPF) about their restructuring plans, such as MothercareHouse of FraserCarpetright and Toys R Us.

The last of these entered PPF assessment after the company collapsed.

Kerrin Rosenberg, chief executive of Cardano, said: "It’s encouraging to see such a significant reduction in the level of risk being carried by FTSE 100 pension schemes.

"At this late stage in the economic cycle and against a backdrop of ongoing Brexit uncertainty, the balance of risks for pensions schemes are increasingly to the downside so to look forward from an improved position of strength is very encouraging.

"We hope that those trustees that have seen their position improve use this opportunity to make sure they are prepared and in a resilient place to weather the next downturn."