Actuarial valuations typically take place every three years in order to reassess defined benefit (DB) pension deficits and liabilities, using up-to-date economic assumptions. Over the last decade, pension deficits and liabilities have been worsening due to the low interest rate, low bond yield environment, leading trustees to call for greater contributions from the sponsoring company.
Whilst this is part of a long term trend, this year is plagued by additional economic uncertainty brought about by Brexit and the UK general election, with increased market volatility affecting pension funding positions negatively.
Companies with large pension liabilities that are currently or imminently carrying out an actuarial valuation include BAE Systems, BT, GlaxoSmithKline, Lloyds Banking Group, Standard Life and Tesco. Some of these have pension liabilities worth more than the company’s equity value, a position that could make trustees and shareholders equally nervous.
Whilst several FTSE 100 companies could choose to settle their pension deficits in full by withholding dividends, many are reluctant to do so against their relative enthusiasm for declaring dividends for their shareholders.
According to JLT’s research, 44 FTSE 100 companies could settle their pension deficits in full with a payment of up to one year’s dividend, 9 companies would need a payment of up to two years’ dividends to settle their pension deficits in full and 7 companies would need a payment of more than two years’ dividends in order to settle their pension deficits in full.
The total disclosed pension deficit of the FTSE 100 companies was £26 billion and the total dividends paid by companies with a defined benefit pension scheme in the FTSE 100 was £68.5 billion as at 31 September 2016 (latest data available).
This compares to a deficit of £48 billion and dividends of £67 billion one year ago. In total, the amount contributed to FTSE 100 company pension schemes was £13.5 billion, up from £13.4 billion in the previous 12 months.
Charles Cowling, Director, JLT Employee Benefits, comments: “Actuarial valuations carried out this year are likely to show not only much bigger deficits than three years ago but also a massive increase in contributions needed to fund ongoing DB benefits – for those few pension schemes that are still providing DB benefits to employees. This is going to lead to some very tough negotiations on pension scheme contributions. With seven FTSE100 companies already paying more in pension contributions than in dividends to shareholders, this has the potential to hit shareholder returns. Pension scheme members may also suffer as the last few open Private Sector DB pension schemes are closed in the face of impossibly high contribution costs.”
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