Only 23 FTSE 100 companies 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), according to research from JLT Employee Benefits. More broadly, only 58 FTSE 100 companies are still providing more than a handful of current employees with DB benefits (i.e. ignoring companies who are incurring ongoing DB service costs of less than 1% of total payroll).
JLT EB estimates that after allowing for the impact of changes in assumptions and market conditions, the underlying reduction in ongoing DB pension provision is a further 7% in the last 12 months alone.
Meanwhile, there are a number of companies reporting very significant individual changes to investment strategies. Seven FTSE 100 companies changed their bond allocations by more than 10% led by BG who saw a 22% switch to bonds and Babcock International who saw a 21% switch. In total 59 FTSE 100 companies have more than 50% of pension scheme assets in bonds.
The total deficit in FTSE 100 pension schemes is estimated to be £60 billion at 30 June 2014, a reduction of £20 billion from 12 months ago. This improvement occurred despite the total deficit funding decreasing to £7.7 billion in the year to 30 June 2014 from £8.8 billion in the previous year.
In the last 12 months, the total disclosed pension liabilities of the FTSE 100 companies have risen from £533 billion to £577 billion. A total of 15 companies have disclosed pension liabilities of more than £10 billion, the largest of which continues to be Royal Dutch Shell, with £54 billion. A total of 19 companies have disclosed pension liabilities of less than £100 million, of which 13 companies have no defined benefit pension liabilities.
Charles Cowling, Director, JLT Employee Benefits, comments: “DB pension provision in the UK continues to decline and there are now fewer than a quarter of companies offering DB benefits to a significant number of employees. We expect this trend to continue. Government proposals to liberalise pensions announced in this year’s Budget and updated earlier this month, continue to make DC pensions more appealing to employees and corporates alike. The new proposed freedoms particularly with regards to bequests and inheritance tax treatment look set to change the pensions’ landscape for good.
“Despite the ongoing decline of DB pension provision, the current deficit at 30 June 2014 has held at £60 billion. Total disclosed liabilities however have risen alarmingly from £533 billion to £577 billion and remain a considerable drag on many FTSE 100 companies. Indeed, if pension liabilities were measured on a “risk-free” basis rather than using a AA bond discount rate, the total disclosed pension liabilities of the FTSE 100 would increase from £577 billion to £645 billion, and the total deficit at 30 June 2014 would be around £135 billion.
“Looking ahead, the key to addressing this huge shortfall will be strengthened covenants and the successful implementation of the Pension Regulator’s new funding code. Clearing deficits as quickly as the Company can afford to, without irreparably damaging the sponsor’s growth and investment plans along with its long term ability to contribute to the pension scheme will be the challenge of both Companies and Trustees going forward.”
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