As at 30 June 2018, the pension deficit stood at £35bn compared to FTSE350 companies’ total pre-tax profits of £210bn. This bucks the trend since 2011 where deficits steadily increased as a proportion of pre-tax profits from a low of 25% - hitting a peak of 70% in 2016.
However, the aggregate deficit has also reduced thanks to pension scheme investment portfolios performing strongly and companies increasing the level of deficit contributions being paid. This is the third year in a row that deficit contributions have increased, suggesting that the FTSE350 companies are stepping up their commitment to paying down DB pension scheme deficits.
The Barnett Waddingham report also found that the average deficit contribution paid by FTSE350 companies as a proportion of dividends remained at 10% in 2017.
The Pensions Regulator may be concerned that around 43 companies increased dividend payments to shareholders while at the same time reducing deficit contributions. However, within this group there will be some companies who agreed to pay higher levels of contributions in the short term, which have now done their job in reducing the DB deficit. It is only right that they can now return to more normal contribution levels.
While the aggregate deficit has reduced, some companies face many more years of paying deficit contributions if they continue at current levels. The vast majority of companies disclosing an IAS19 deficit are still 10+ years from showing a DB surplus on their balance sheet.
In contrast, a significant number of companies are funding their pension schemes beyond the liability value disclosed in the accounts, due to the requirement to fund to the level determined by the Trustees. In aggregate this accounted for £4bn of additional company funding during the year to 31 December 2017.
Nick Griggs, Partner at Barnett Waddingham, said: “The majority of companies ended 2017 with their DB scheme in a healthier state than the previous year. While this is positive news, it would not take much to tip the balance the other way. Our analysis suggests that a 0.5% fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE350 DB schemes up to £85bn.”
“With the health of the UK and global economy threatened by a lack of progress with Brexit and the threat of a trade war from Trump’s America First assault, there could a major impact on the size of pension deficits and the ability of FTSE350 companies to pay the contributions needed to clear these. Companies should ensure that they are comfortable with the level of investment risk being taken by their DB schemes and that the appropriate controls are in place to manage these risks.”
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