• Net employer contribution for a typical DB scheme reaching 52% of employment costs vs. 26% three years ago
• Higher deficits will also add to pressure for increased contributions
• Actuarial valuations likely to lead to calls for much higher cash contributions
This projected jump in pension costs is predicated on JLT’s findings that net employer contributions for a typical DB scheme have doubled from 26% to 52% of employment costs over the last three-year actuarial valuation cycle. The total cash contribution costs are likely to be even higher after allowing for the massive increase in funding required to pay down deficits.
Several household name companies, including HSBC, Marks & Spencer, Royal Mail Group, Standard Life and Tesco have closed their DB schemes to all employees in the last year. United Utilities withdrew plans to close their DB scheme last year pending the results of their 2016 actuarial valuation, following which a fresh consultation on pension provision is expected.
Companies that are due to have an actuarial valuation in 2016-17 are therefore particularly at risk of facing demands in the near future for increased contributions to cover higher employee service costs and higher deficits.
According to JLT research only 23 companies, i.e. less than a quarter of the FTSE 100, are still providing DB benefits to a significant number of employees - defined as incurring ongoing DB service cost of more than 5% of total payroll. Those companies still holding on to their DB pension schemes are not expected to continue doing so for much longer.
Additional research from JLT found that in the year to 31 March 2016, FTSE 100 companies contributed a total of £6.23bn in deficit funding, up from £6.18bn in the previous 12 months. BT led the way with a deficit contribution of £0.85 billion (net of ongoing costs), but 49 other FTSE 100 companies also reported significant deficit funding contributions in their most recent annual report and accounts.
The total deficit in FTSE 100 pension schemes at 31 March 2016 is estimated to be £87 billion. This is broadly unchanged from the position 12 months ago. Only 29 companies disclosed a pension surplus in their most recent annual report and accounts while 59 companies disclosed pension deficits.
A total of 16 companies have disclosed pension liabilities of more than £10 billion, the largest of which is Royal Dutch Shell with disclosed pension liabilities of £57 billion. A total of 21 companies have disclosed pension liabilities of less than £100 million, of which 12 companies have no defined benefit pension liabilities.
Charles Cowling, Director, JLT Employee Benefits, comments: “With actuarial valuations coming up for many FTSE 100 pension schemes, 2016 and 2017 could see a huge increase in DB pension costs for those employers that still provide final salary pensions. It is difficult to conceive that such a prospect wouldn’t lead the schemes’ sponsors to take some kind of drastic action to mitigate those expenses, particularly as large pension deficits can have a detrimental impact on the company’s financial health and, therefore, its share price and dividend payments. As has been seen recently, if a company is in a really bad shape, a large pension deficit could tip it into insolvency. We therefore expect employers to be reviewing any remaining ongoing DB pension provision and monitoring their DB pension deficits very closely.”
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