Just 12 companies (i.e. just 5% of the FTSE 250) 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). This is part of a broader trend of significant decline in ongoing DB pensions as employers seek to contain their soaring cost.
In April, Tesco took steps towards ending its DB scheme to future accrual and in May, Tata Steel announced plans to close its DB scheme despite fierce resistance from its employees. Morrisons has also consulted on the closure of their DB pension scheme and Manx Telecom has closed their DB scheme in an attempt to curtail deficits.
Last year saw total deficit funding of £1.4 billion, up from £1.2 billion the previous year. Phoenix Group led the way with a deficit contribution of £100 million, but 38 other FTSE 250 companies also reported significant deficit funding contributions in their most recent annual report and accounts. Six out of the 10 FTSE 250 best funded schemes were financial services firms, which JLT Employee Benefits says may reflect their better understanding of pension risks / liabilities.
The average pension scheme asset allocation to bonds is 52%, down from 55% in the previous year, but up from 49% five years ago. In 22 companies, pension scheme asset allocation to bonds has changed by more than 10%.
A significant number of FTSE 250 pension schemes represent a material risk to their sponsors, with 17 FTSE 250 companies having total disclosed pension liabilities greater than their equity market value. For example, FirstGroup has total disclosed pension liabilities of almost four times its equity market value.
Only 37 companies disclosed a pension surplus in their most recent annual report and accounts; 104 companies disclosed pension deficits. However, we estimate that 20 companies would disclose a surplus if they had a year-end of 31 December 2014.
In the last 12 months, the total disclosed pension liabilities of the FTSE 250 companies have increased from £71 billion to £73 billion. A total of 21 companies have disclosed pension liabilities of more than £1 billion, the largest of which is FirstGroup with disclosed pension liabilities of £4.6 billion. A total of 157 companies have disclosed pension liabilities of less than £100 million, of which 108 companies have no defined benefit pension liabilities.
Charles Cowling, Director at JLT Employee Benefits, comments: “The challenges of escalating pension costs and huge pension deficits are well documented for those companies with DB provisions in the Private Sector.
“With this year's introduction of the new "Freedom and Choice" changes for DC schemes (making such schemes a lot more attractive) and with next year's cessation of contracting-out (and the creation of a new Single Tier State Pension), any remaining reasons to hang onto DB pension provision in the Private Sector have all but disappeared.
“DB pensions have become too expensive, too risky, and amongst UK Private Sector companies, are no longer part of HR strategies for employee recruitment and retention. Sadly, we expect that within 12 months virtually all DB pension provision in UK companies will have ceased.”
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