But looming changes to accountancy rules could worsen FTSE 100 balance sheets by around £50bn, potentially impeding their ability to pay contributions, says LCP.
Blue chip companies disclosed an overall accounting funding level of 101 per cent, according to latest Accounting for Pensions (AfP) analysis from LCP, the first positive showing since the crash of 2007/08.
The latest edition of LCP’s landmark AfP report shows the overall accounting position has improved from 95 per cent to 101 per cent in 2017, turning a £31bn deficit into a £4bn surplus by the end of the year. Since that time, the surplus has continued to grow, reaching over £20bn by the end of April 2018.
The report – now in its 25th edition – documents how this rise in funding levels has been driven by company contributions of £13bn – 25 per cent lower than the record £17.3bn in 2016 – and strong investment growth over the year, as well as changes in the approach to longevity and discount rate assumptions which largely offset the impact of worsening financial conditions.
The report highlights the potential impact of looming changes to accounting standards (“IFRIC 14”) on the health of FTSE 100 balance sheets overall. The detail is not yet known, but under the new provisions FTSE 100 companies could find a significantly worsened balance sheet position, around £50bn overall and well over £1bn for some individual companies. For some, this could threaten the ability to pay dividends or raise capital, and may increase regulatory capital requirements in the financial sector.
Further, the announcement in February 2018 of new IAS 19 accounting rules will significantly change how some companies account for ‘special events’ like changes to the benefits offered, in unintuitive and surprising ways.
The report shows FTSE 100 companies continued to pay more in shareholder dividends than pension contributions, paying £80bn in dividends – six times more than the £13bn paid to pension schemes
Nearly all FTSE 100 companies have a pension deficit on an insurance buyout basis, and for over a third this deficit is material compared to their market capitalisation.
In a significant change in approach, a majority of companies are using increasingly sophisticated ways to set the IAS 19 discount rate assumption, improving FTSE 100 balance sheets by around £15bn, says the report.
Also reflecting a new approach, three-quarters of the FTSE 100 are now using the most up-to-date assumptions related to mortality which show that people are not living as long as previously assumed, says LCP.
Appetite for pension risk continues to fall, with average asset allocation in higher risk equities falling to less than one-quarter – as compared with more than 60 per cent 15 years ago.
The report concludes that despite a ‘contrary regulatory position’, company profitability does not appear to be a key driver when it comes to determining the level of company contributions.
LCP partner and lead author of the report Phil Cuddeford says: “For one of the first times in years, FTSE 100 pension schemes have clearly swung into surplus when measured on an accounting basis. Although that’s good news, it is essential that corporate sponsors don’t think they’re out of the woods just yet. History has proven that such accounting surpluses can quickly be wiped out by deteriorating market and economic conditions. On trustees’ typical pension scheme funding basis, significant deficits remain, and the persistent gap between dividend payments and scheme contributions is likely to be scrutinised more intensely in the wake of the high-profile collapses of Carillion and BHS.”
“If balance sheet accounting changes go ahead as feared, the FTSE 100 are likely in for a nasty shock. There are some companies which could be exposed to balance sheet hits of well over £1bn, a stark reality not likely to be well received by either markets or shareholders.”