Pensions - Articles - LCP launch 19th report on DB Pension schemes for FTSE 100

 LCP has today published its annual Accounting for Pensions Report, now in its 19th year. The report provides a comprehensive analysis of the defined benefit pension schemes of the FTSE 100 and examines the ways in which companies are managing ever pressing pension challenges.
  

 The 2012 report estimates that the combined IAS19 deficit of FTSE 100 companies' pension schemes was £41 billion at 31 May 2012, more than doubling the 2011 deficit of £19 billion. This equates to total IAS19 liabilities of £447 billion versus assets of £406 billion with the deficit increasing despite continuing high levels of company contributions. FTSE 100 companies paid a total of£21.4 billion into their pension schemes in 2011, with almost £11 billion of those contributions going towards removing deficits in their defined benefit schemes rather than boosting benefit accrual for current employees. As companies become subject to auto-enrolment requirements from later this year, overall pension costs will continue to rise and, unless they cut back on current contributions and benefits, pension contributions for the FTSE 100 are projected to exceed £26 billion by 2013.
  

 Commenting on the report, LCP partner and report author Bob Scott said: "The increased deficit this year reflects the fact that corporate bond yields sit at record lows and equity markets have been drifting for a number of years now. The challenge this poses to the UK's leading companies is compounded by the significant volatility in deficits on a day-to-day basis. Deficits have fluctuated by as much as £10 billion in a single day as uncertainty continues to characterise both equity and debt markets. Against this background, we have seen companies pay very substantial pension contributions: four companies paid over £1 billion into their defined benefit pension schemes in 2011 and, earlier this year, BT made a further £2 billion payment to accelerate the removal of its deficit - the largest ever one-off deficit contribution to a UK scheme. "
  

 LCP's 2012 report has shown that the ongoing trend to reduce levels of defined benefit provision has continued and, for the first time, not one of the FTSE 100 companies examined remains committed to offering a final salary scheme to new employees. Indeed, most FTSE 100 companies now only offer new employees a defined contribution scheme under which all the pensions risk is passed to the individual. Nevertheless, a small minority, including Tesco and Morrisons, do continue to offer an element of defined benefit pension provision thereby providing added security for their employees. It remains to be seen whether the Pensions Minister's well-publicised enthusiasm for so-called "defined ambition" schemes will lead to more companies following this route.
  

 As reported in LCP's survey last year, the move to CPI inflation has meant lower liabilities for many companies and, as reports have indicated that the gap between RPI and CPI could widen in future, companies have assumed even lower levels of future indexation. This means further reductions in costs for companies, but at the expense of FTSE 100 pension scheme members who will receive even lower benefits than expected.
 FTSE 100 pension schemes continue to withdraw from equity markets with just 35% of assets being held in equities at the end of 2011, compared to 43% in 2011 and nearly 70% ten years ago. This reflects the changing nature of pension schemes, as the majority of liabilities now relate to former employees, and a general move towards lower risk investment strategies.
  

 Bob Scott continued: "The overall picture is a challenging one. On the horizon is the prospect of European legislation which could mean additional funding requirements of up to £200 billion should Solvency II style reserving be extended to pension schemes. Committing ever more company resources to make existing benefits more secure will mean that companies are less able to provide benefits for current and future employees. Auto-enrolment will extend basic pension provision to many more people but the extra costs may well lead companies to level down their existing commitments. As a result we can expect more cutbacks in the benefits for future service with a corresponding impact on FTSE 100 employees."

  

 For a copy of the full report please click on the link below