Over the prior year, to 31 March 2017, six companies’ pension contributions outweighed their dividend pay-outs, reflecting the gradual improvement in aggregate funding levels year on year. Across the index, 37 companies could have settled their pension deficits in full, with a payment of up to one year’s dividend.
More than half (53) of FTSE 100 sponsors reported significant deficit funding contributions in their most recent annual report and accounts, as companies continued to offset balance sheet risks with cash injections. A total £14.8bn was paid into schemes during the year, down from £17.4bn in the previous accounting period. This figure was £6.6bn more than the cost of benefits accrued during the year, therefore representing £8.2bn of funding towards reducing pension schemes deficits.
There is some evidence that balance sheet volatility caused by pension schemes can flow through to share price volatility; changes in corporate balance sheet positions due to pension schemes can be separated into expected changes, arising from large contributions, and unexpected changes, arising largely from actuarial gains, losses and changes in assumptions. During the year, 70 companies felt the benefit of an unexpected gain to their balance sheet, while 20 suffered an unexpected loss due to a shift in the actuarial position of their scheme.
The estimated FTSE 100 DB pension scheme deficit fell £2bn to £33bn during the period. Total disclosed pension liabilities across the index fell £13bn, to £695bn, down from £705bn the previous year. Despite this improvement, pension schemes continue to represent a material risk to several of the UK’s largest companies. Nine FTSE 100 companies have total disclosed pension liabilities greater than their equity market value; four have total disclosed liabilities almost double their market value.
Charles Cowling, Chief Actuary, JLT Employee Benefits, said: “The inherent tension between funding pension obligations and paying dividends persists across the UK’s blue-chip index, but the tide is starting to turn among some sponsors. It is encouraging to see schemes acknowledging the balance sheet risks presented by unfunded pension obligations and taking action to shore up their position. The companies with the biggest pension funding problems are slowly getting to grips with it.
“Corporate sponsors are committing significant capital to their pension scheme through cash injections and are clearly weighing up the need to return value to shareholders against improving their funding position. FTSE 100 sponsors have also been proactive in taking steps to de-risk their schemes. More than two-thirds (69) of companies in the index now have more than half of their scheme assets in bonds, with many seeking to lock in gains following strong equity market performance in 2017.
“Looking ahead, balance sheet resilience could be crucial over the coming months as we approach the Brexit deadline. Corporate sponsors and schemes should think carefully about their risk exposures through a period of heightened political and potential market volatility. With expectations of muted growth into 2019, locking in gains and improving liability matching may help sustain funding positions through times of uncertainty.”
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