The number of FTSE 100 companies offering sizeable* Defined Benefit (DB) schemes has plunged from 65 to 56 in the 12 months to 30 September 2014, according to research from JLT Employee Benefits (JLT). Of these, only 24 companies (less than a quarter of the FTSE 100) are still providing DB benefits to a significant number of employees**. The latest announcement from Tesco confirms this trend away from DB pension provision amongst Private Sector employees.
Over the same period, the total deficit in FTSE 100 pension schemes deteriorated by £14 billion to £66 billion whilst their liabilities rose by £44 billion to £591 billion. A total of 16 companies have disclosed pension liabilities of more than £10 billion, whilst 21 companies have disclosed pension liabilities of less than £100 million.
In total, the amount contributed to FTSE 100 company pension schemes was £14.6 billion, down from £15.7 billion in the previous accounting year. This is more than the £5.8 billion cost of benefits accrued during the year. It therefore represents £8.8 billion of funding towards reducing pension scheme deficits, but a decrease on the previous year’s deficit funding of £8.9 billion.
Several companies and trustees are continuing to switch pension assets out of equities into bonds. BG Group is the latest company to report a big switch, with bond allocations increasing by 22%. A total of 58 FTSE 100 companies have more than 50% of pension scheme assets in bonds. The average pension scheme asset allocation to bonds has increased slightly from 55% to 56%.
Charles Cowling, Director, JLT Employee Benefits, comments:
“Although DB pension funds have seen some decent investment performance, the benefit was outweighed by a higher increase in liabilities, caused by continued falls in interest rates, thus leading to an increase in pension deficits. This low interest rate and low bond yields environment is expected to continue into 2015 and beyond, maintaining the funding pressure on pension schemes.
“It is with no surprise that fewer and fewer FTSE 100 companies are offering DB pension benefits as the risks and costs associated with their provision become too great to bear, as evidenced by Tesco’s recent announced proposal to close its DB pension scheme to all members – an inexorable trend, which is now endemic in the Private Sector; even amongst the very largest employers. Indeed we expect to hear further similar announcements from other companies in 2015.
“Whilst closing a scheme outright will not necessarily make any impact on the pension liabilities already accumulated on a company’s balance sheet, it will limit their future growth. Moreover, many companies are taking steps to manage and reduce their DB liabilities through a number of different de-risking strategies. In particular, the newly introduced flexibilities in DC schemes coming into effect in April (when members will be able to cash in their entire DC pension pot) mean we expect to see many members transfer their DB pensions into DC funds giving relief to companies with large DB liabilities.”
*Companies that incur ongoing DB service costs of more than 1% of total payroll
** Companies that incur ongoing DB service cost of more than 5% of total payroll
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