LCP has today published its 20th annual Accounting for Pensions report. 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 issues. In this 20th edition the report also looks back over two decades and more to study the major events that have shaped today’s pensions landscape.
The 2013 report estimates that the combined IAS19 deficit of FTSE 100 companies’ pension schemes was £43 billion as at 30 June 2013 compared to £42 billion last year, reflecting IAS19 liabilities of £490 billion versus assets of £447 billion. The deficit remains stubbornly high in spite of £21.9 billion in company contributions.
The overall level of cover this year sits at 91%, which is in contrast to the picture 20 years ago when the average FTSE 100 pension scheme’s assets were sufficient to cover 120% of liabilities and companies enjoyed pension contribution ‘holidays’. Back then companies with pension surpluses were a draw for corporate activity to potentially realise the benefit of the surplus. With deficits riding high in 2013 and the average pension liability equivalent to 45% of market cap, a company with a large DB scheme is now somewhat less appealing.
Commenting on the report, LCP partner and report author Bob Scott said: “Pension planning continues to be blighted by seemingly constant regulatory and legislative change. In the past 12 months alone we have seen the re-introduction of auto-enrolment; the announcement of a flat-rate State pension and the end of contracting-out; and further changes to the IAS19 accounting standard. Is it any wonder that the past 20 years have seen traditional final salary pension schemes phased out to be replaced largely by lower-quality defined contribution schemes?”
This year falling bond yields have meant higher funding targets and higher funding deficits, prompting calls for The Pensions Regulator to permit ‘smoothing’ of assets in funding valuations – something which was common practice in 1994. However, we were pleased that the DWP rejected this call as a return to smoothing would have been a retrograde step.
As equity values rose over the year and gilt yields looked increasingly unattractive, asset holdings in equities grew to 36.4% compared with 34.8% last year. This figure is still – however – nowhere near the figures of almost 70% in 2001.
The survey also shows that, in a challenging economic environment, companies are increasingly looking for alternatives to cash funding. In the 1970s, the British Rail pension fund famously invested in fine art; in 2012/13 companies looked to everything from cheese (Dairy Crest) and whisky (Diageo) to aircraft (International Airlines Group), while others granted their schemes a charge over assets such as power stations (Centrica), hotels (Intercontinental Hotels Group) and machinery (Rexam).
Unsurprisingly the closure of DB schemes continues with 39 FTSE 100 companies now offering DC pensions only – a figure that stood at just two in 1996 when BskyB and Foreign & Colonial were the only FTSE 100 companies to differ from the norm at that time. During 2012, seven further companies either closed, or proposed closing, their schemes to future accrual (including FTSE 100 stalwarts HSBC and Kingfisher), a trend begun in 2005 by Rentokil. This now leaves only 61 FTSE 100 companies with DB schemes open to future accrual. The number is expected to fall further as companies review their options when contracting-out ceases in 2016.
Changes to the IAS19 accounting standard meant that, from 2013, companies have to disclose their full pension deficits on the balance sheet; and, in many cases, show a lower figure for “interest” on their pension scheme assets. These measures are expected to increase balance sheet liabilities by £20 billion and reduce pre-tax profits of FTSE 100 companies by over £2 billion. GSK predicted that this would have reduced their profit by £92 million in 2012.
The last 12 months have also seen the return of auto enrolment, previously outlawed in 1988, and further reductions in tax allowances for pensions savings. Throughout the 90s and into the new millennium the treasury has seen pension assets as a potential source of income; and this has intensified as, in 2013, ever more restrictive and complex provisions are set to discourage pensions saving even further.
On a positive note, life expectancy is up again in 2013 and has grown materially in the eight years since companies first began disclosing their estimates. A male retiring at 65 is now expected to live a further 22.8 years, a figure which stood at 19.8 years in 2005. The highest life expectancy figures continue to come from the financial sector. The increased allowance for life expectancy has pushed up FTSE 100 companies’ disclosed pension liabilities by some £40 billion - a figure that compares closely to the overall deficit of £43 billion.
Bob Scott concluded: “Compared to 20 years ago, the typical FTSE 100 company now makes a considerably more detailed and informative pensions disclosure in its annual accounts. With pension liabilities approaching £0.5 trillion - and with constant legislative changes - many companies will be hoping that, in 20 years’ time, they have managed to completely remove any pensions risk from their balance sheets. This may be good news for their shareholders but is unlikely to improve the lot of those employees who are relying on good workplace pensions for their retirement.”
LCP Accounting for Pensions Report
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