The UK’s largest companies have ploughed £200bn into their DB schemes since 2007 to avoid a drop in funding levels.
However despite this large sum, pension consultants LCP say most of this money has simply countered adverse market movements, with the fall in bond yield effectively wiping out much of the value of these increased contributions.
These figures are contained in LCP’s latest ‘Accounting for Pensions’ report. It found that the year end 2020 was the best year-end position for FTSE100 pension balance sheets since 2007. At this point 60 per cent of FTSE100 companies were in surplus at their accounting date and these companies still paid £5bn in contributions into pension schemes.
However, LCP are warning that potential changes to future pensions funding rules could cause FTSE100 deficit contributions to double.
The report also found that the average FTSE 100 chief executive has seen their pension contribution slashed by a third in just two years as regulatory pressure hits. The average CEO’s pension contribution in 2020 stood at around 17 per cent of basic salary, down from 25 per cent in 2018, following tough new rules from the Investment Association. Despite this narrowing of the gap, there remains a disparity between the percentage cost of pensions benefits for CEOs and the average percentage pension cost paid for employees.
Dividends still outpace pension contributions by a large margin. FTSE100 companies paid just over £70bn in dividends in 2020, compared to £10bn in pension contributions. While the dividend level has fallen by a third since 2019, businesses are likely to face increasing pressure from the regulator and trustees to prioritise pensions.
Companies face a huge margin of uncertainty around the financial impact of Covid-19 mortality changes. While LCP believes that the direct impact is likely to be marginal, it suggests companies should tread carefully when making assumptions about life expectancy changes. It adds that the range of possible outcomes on life expectancy predictions — from an improvement in life expectancy due to an increased spotlight on public health, to a flat line in mortality rates due to more direct and indirect deaths due to Covid, translates to a potential positive or negative £30bn impact on liabilities for FTSE100 pension balance sheets.
LCP also points out that the cost of equalising previous GMP transfers could lead to heavy costs for UK pension schemes. This could mean paying £300m for the underpaid benefits, and potentially another £100m in legal, administration and actuarial adviser costs to implement. LCP view that this cost is not proportionate, and believe that it will be down to trustees, sponsors, and their advisers to arrive at a pragmatic response to address this latest challenge.
LCP partner and author of the report Jonathan Griffith says: “There are many challenges on the horizon for pension schemes, particularly around the impact of new regulations on funding, continued market volatility, and the uncertainty around the impact of Covid-19 on life expectancies.
“That said, following a year like no other and over a decade of volatility, the pension schemes of FTSE100 companies have started 2021 from a position of strength – with improved funding levels and reduced risk.”
Gordon Watchorn, head of corporate consulting at LCP, adds: “Now more than ever, it is a tricky balancing act for corporate sponsors to ensure members get their benefits paid in full whilst also making sure other stakeholders’ interests are protected.
“The pensions landscape is changing, and our analysis has highlighted that there remain significant opportunities for those companies who are able to be proactive and fully engage with their pensions strategy.”