Despite the uptick in the aggregate bond allocations, investment mismatching persists across some of the UK’s largest schemes. Large equity positions enabled UK blue chip sponsors to reap the benefits of rising markets through the second half of 2017, which, combined with significant sponsor contributions, helped drive a 34% improvement in aggregate funding levels.
The estimated FTSE 100 DB pension scheme deficit fell £14bn to £41bn during the period; 53 companies reported significant deficit funding contributions in their most recent annual report and accounts as sponsors continued to offset balance sheet risks with cash injections. Total contributions fell to £8.7bn, down from £11.3bn the previous year, headlined by a £1bn sponsor contribution from a single index constituent. Meanwhile, total deficit contributions were dwarfed by dividends declared across the index; 39 companies could have settled their pension deficits in full with a payment of up to one year’s dividend.
The total disclosed pension liabilities across the FTSE 100 continued to rise, reaching £695bn, up from £681bn the previous year. Nine companies have total disclosed pension liabilities in excess of their equity market capitalisation and a further nine have disclosed pension deficits greater than 10% of their equity market value.
Companies continued to tackle mounting pension liabilities by closing schemes to both future and current employees. Three of last year’s top ten providers of DB benefits slipped out of this year’s list, as even the largest corporates brought an end to DB provision. At the other end of the scale, 27 FTSE 100 companies reported a zero (or negative) cost of current DB service costs, up from 25 in the previous year.
Charles Cowling, Chief Actuary, JLT Employee Benefits, said: “FTSE 100 pension schemes have clearly been proactive in taking steps to de-risk their schemes; the significant shift into bonds is certainly an encouraging sign of trustees’ and sponsor commitment to tackling scheme risk in the context of company balance sheets. It is also reflects pension schemes locking in gains as equity markets have powered ahead.
“That said, high levels of investment mismatching clearly persist. Equity allocations proved helpful to scheme portfolios through the second half of 2017, when strong market returns provided a much-needed boost to portfolio returns and supported improvements in underlying funding levels. However, market conditions in 2018 have delivered a much rougher ride and maybe as a result, pension schemes are increasingly looking at alternative investment strategies.
“A recent feature in pension scheme investments has been the emergence of CDI (cash-flow driven investment). CDI strategies allow investment in low risk matching bonds but at the same time offer higher returns through a diverse portfolio of multi-asset credit funds. While pension schemes have been keen to reduce risk, switching out of equities into bonds can mean an unwelcome call for additional funding on employers. However, developing CDI strategies are increasingly allowing pension schemes to reduce risk and at the same time retain sufficient investment returns to avoid the need for additional employer funding.
“With the growing interest in CDI strategies and the opportunities to lock in gains offered by recent strong equity markets, we expect to see the trend to de-risk pension schemes by switching out of equities to continue, and possibly even gather pace during 2018.”
• AVERAGE SCHEME ALLOCATION TO BONDS RISE TO 64%, UP FROM 35% 10 YEARS AGO
• 10 SCHEMES INCREASED THEIR ALLOCATION TO BONDS BY MORE THAN 10% OVER THE PAST 12 MONTHS
• THE TOTAL ESTIMATED DEFICIT ACROSS FTSE 100 DB PENSION SCHEMES FELL 34% TO £41BN* OVER THE YEAR TO 31 DECEMBER 2017
• THREE OF LAST YEAR’S TOP TEN PROVIDERS OF DB BENEFITS CLOSED THEIR SCHEMES DURING THE 12-MONTH PERIOD
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