The survey also highlighted a change in asset allocation in recent years. The average allocation to growth assets, equity and property, has steadily decreased from 46% in 2009 to 29% in 2016, while bonds and fixed income assets have increased from 41% in 2009 to around 54% in 2016.
Martin Hooper, Associate at Barnet Waddingham, said; “On the face of it, the deficits disclosed by the FTSE100 remained remarkably stable, given the scale of movements in discount rates and inflation expectations. However, with the level of contributions made towards the pension deficits over the year, companies would have been hoping for an improvement.
“Looking ahead, the market is currently pricing in a gradual rise in interest rates. If these do not materialise it will significantly limit any progress made towards improving the FTSE100 Pensions deficit. The market has already priced in higher inflation expectations following the Brexit vote and the US election. However, further uncertainty and any knock-on effect on the sterling, could raise inflation expectations and push up valuations of liabilities.
“The IAS19 disclosures are ultimately only an indicator of the financial health of these schemes. The cash requirements, reassessed every three years and the actual cost to the sponsor, will depend on how the assets are invested and what returns can be achieved, as well as how liabilities are discharged. For valuations carried out in the coming three yearly cycle, deficits against the funding basis may be significantly worse. It is likely many schemes will have to rethink their timetable for achieving full funding and whether the gilts-based funding approach, typically used for scheme funding, remains appropriate. “
Further survey highlights:
• The average discount rate at the end of 2016 decreased by 1.1% pa from 2015
• The average RPI inflation assumption adopted by the companies in our survey increased by 0.2% p.a.
• The combined impact of these changes increased the value of liabilities by around £100bn
• Salary increase assumptions remain stable relative to inflation
• The average IAS19 funding level for the companies in our survey was 91% in 2016 down from 94% in 2015
• Schemes have around 29% of their assets allocated to growth assets, down from 31% in 2015
• Life expectancy assumptions have decreased slightly
• Asset allocation schemes had around 29% of their assets allocated to growth assets, down 2% from 2015
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