In aggregate, FTSE 100 scheme portfolios fared better against a rising market backdrop, particularly those continuing to run very large mismatched equity positions. Given the bond-like nature of pension liabilities, schemes’ allocation to bonds provide a useful proxy for the level of mismatching currently at play in portfolios. The average scheme asset allocation to bonds rose to 63% from 61% the previous year, indication that investment mismatching persists across some of the UK’s largest schemes.
UK blue chip sponsors continued to pay significant contributions to offset their pension scheme deficits; more than half reported significant deficit funding contributions in their most recent annual report and accounts. Total contributions during the period increased 65% to £10.8bn, up from £6.4bn the previous year, but this increase was largely attributable to activity by a small number of schemes.
Despite some progress in the aggregate funding position, total disclosed pension liabilities rose 21% to £710bn, from £586bn, over the 12-month period. Low interest rates, increasing life expectancy and aggressive regulation have contributed to spiralling pension liabilities over recent years, prompting successive sponsors to withdraw defined benefit provision and close schemes to future accrual. Fewer than one fifth of FTSE 100 companies (19) are still providing DB benefits to a significant number of employees.
The distribution of liabilities across index constituents remains uneven; at one end of the scale, 17 companies – large, legacy businesses – have disclosed pension liabilities of more than £10bn, while at the other end, 9 companies – typically more recent additions to the index – are free of DB obligations, reporting no liabilities.
Total deficit contributions continued to be dwarfed by dividends declared across the index; 42 companies could have settled their pension deficits in full, with a payment of up to one year’s dividend. The tension inherent between fund scheme deficits, delivering shareholder value and holistic covenant strength has been brought into sharp focus over recent months by the high-profile collapse of Carillion and BHS. The high ratio of total dividends paid versus the total disclosed scheme deficit** – £73bn of dividends relative to a deficit of £43bn, a ratio of 1.7x – highlights the missed opportunity for sponsors to substantially pay down their deficit and contribute towards further de-risking measures.
Charles Cowling, Director, JLT Employee Benefits, said: “Market conditions have certainly been more helpful to scheme portfolios over the past year, with strong equity market returns providing a much-needed boost to investment performance. Sponsors too, in some cases, have stepped up to the mark and taken the decision to inject cash into their schemes as part of their wider approach to managing balance sheet risks.
“That said, while it is positive to see a reduction in sponsors’ total disclosed deficit, it is important to emphasise that this number masks the materially worse funding position likely to be reported by upcoming actuarial valuations.
“More broadly, progress has not been universal across FTSE 100 pension schemes and remains the story of the few rather than the many. While a number of scheme sponsors are acutely aware of the risks and have taken steps to address looming liabilities and deficits, too many are burying their heads in the sand and continuing to prioritise the short-term needs of shareholders over their long-term obligations to scheme members and, arguably, the underlying health of their business.
“Increasingly, our analysis highlights the contrast between the new world and an old economy, particularly in sectors already under the pressures of wider structural change – retail, banking, telecoms to name but a few. Looking ahead, legacy businesses who fail to tackle the mounting risks in their schemes may struggle to compete with newer, more agile market entrants, unencumbered by DB pressures.”
*estimated deficit as at June 30 2017.
**based on the IAS19 numbers disclosed in most recently published annual reports and accounts.
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