Defined BenefitOct 16 2018

FTSE 100 firms could face £15bn profit hit

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FTSE 100 firms could face £15bn profit hit

The UK's largest companies could suffer a profit hit of up to £15bn, alongside an increase in pension deficit and contributions, following a court ruling expected next month.

In its Accounting for Pensions half-year update, pensions advisory firm LCP warned FTSE 100 firms might have to recognise an additional liability on their balance sheets as soon as 2018 due to a case on gender equalisation going through the courts.

The case, brought by the trustees of Lloyds Bank's defined benefit (DB) schemes, was heard in the High Court this summer, and could result in the removal of inequalities arising from unequal guaranteed minimum pensions (GMPs) between men and women.

The case concerns a pension problem spanning almost three decades and could have widespread implications for hundreds of thousands of pensioners.

The problem is that between 1978 and 1997 employers sponsoring DB pension schemes could contract their employees out of the additional state pension, as long as the scheme paid a GMP.

The benefit of contracting out was that both employer and worker saw a reduction in their National Insurance contribution.

DB pension members who had contracted out should have had their savings equalised – a move which will benefit mostly women, but also some men.

However, since the equalisation requirement was handed down by the European Court of Justice in 1990, government and industry have failed to reach a conclusion on how to correct this discrepancy.

About 2,400 different pension schemes in the UK are affected and correcting it could have an impact of up to £20m for the plans' trustees and sponsoring employers.

According to the Lloyds Trade Union, there are 255,000 members in its three DB plans - Lloyds Bank Pension Scheme No 1 and No 2 and the HBoS final salary pension scheme – which could be affected by the ruling.

According to Phil Cuddeford, LCP partner and lead author of the report, the forthcoming GMP equalisation ruling "could lead to a one-off hit to profits this year of around £15bn for FTSE 100 companies as well as a larger overall deficit and higher contributions".

He said: "Although clarity around this issue will be welcome, the broader impact on FTSE 100 companies and many others could be stark."

The cost for pension schemes is not quite clear, as different methods to equalise GMPs were also discussed in court.

Specifically in the Lloyds case, one of the proposals put forward by the union's actuaries' will cost the bank about £500m, while another will cost about £100m.

The ruling might also be appealed or further cases required to clarify the position, LCP added.

maria.espadinha@ft.com