The firm’s latest quarterly report shows that 42 companies could have settled their pension deficits in full by making a payment of up to one year’s dividend.
The ratio of total dividends paid versus the total disclosed scheme deficit – £73bn of dividends relative to a deficit of £43bn stood at 1.7x. This highlights the missed opportunity for sponsors to substantially pay down their deficit and contribute towards further de-risking measures, says JLT Employee Benefits.
Politicians have criticised companies with significant scheme deficits for failing to reduce them while increasing dividends to shareholders. Carillion, whose scheme is expected to go into the PPF following the collapse of the company earlier this year, had paid a rising dividend for every year of its existence, despite sitting on a deficit of over half a billion pounds.
The JLT Employee Benefits report found FTSE 100 DB scheme deficits fell by 32 per cent in the year to June 2017 as favourable market conditions and significant sponsor contributions impacted solvency.
FTSE 100 scheme portfolios, particularly those continuing to run very large mismatched equity positions, fared better than other schemes against a rising market backdrop.
More than half of UK blue chip sponsors reported significant deficit funding contributions in their most recent annual report and accounts, with total contributions during the period increasing by 65 per cent to £10.8bn, up from £6.4bn the previous year. However, this increase was largely attributable to activity by a small number of schemes.
But total disclosed pension liabilities rose 21 per cent to £710bn, from £586bn, over the 12-month period, fuelled by low interest rates, increasing life expectancy and aggressive regulation. Just 19 of FTSE 100 companies are still providing DB benefits to a significant number of employees.
The distribution of liabilities across index constituents remains uneven; at one end of the scale, 17 companies – large, legacy businesses – have disclosed pension liabilities of more than £10bn, while at the other end, 9 companies – typically more recent additions to the index – are free of DB obligations, reporting no liabilities.
JLT Employee Benefits director Charles Cowling says: “Progress has not been universal across FTSE 100 pension schemes and remains the story of the few rather than the many. While a number of scheme sponsors are acutely aware of the risks and have taken steps to address looming liabilities and deficits, too many are burying their heads in the sand and continuing to prioritise the short-term needs of shareholders over their long-term obligations to scheme members and, arguably, the underlying health of their business.
“Market conditions have certainly been more helpful to scheme portfolios over the past year, with strong equity market returns providing a much-needed boost to investment performance. Sponsors too, in some cases, have stepped up to the mark and taken the decision to inject cash into their schemes as part of their wider approach to managing balance sheet risks.
“That said, while it is positive to see a reduction in sponsors’ total disclosed deficit, it is important to emphasise that this number masks the materially worse funding position likely to be reported by upcoming actuarial valuations.
“Increasingly, our analysis highlights the contrast between the new world and an old economy, particularly in sectors already under the pressures of wider structural change – retail, banking, telecoms to name but a few. Looking ahead, legacy businesses who fail to tackle the mounting risks in their schemes may struggle to compete with newer, more agile market entrants, unencumbered by DB pressures.”
