DB pension liabilities up £95bn amid shareholder paydays

Paterniano Del Favero
Agosto 29, 2017

According to JLT's research, only 24 FTSE 100 companies disclosed a pension surplus in their most recent annual report and accounts, while 66 companies disclosed pension deficits. This compared to the companies' combined £88.9bn in pre-tax profits generated previous year. This report shows that the trend of DB closures continues at the UK's largest companies and we expect that defined benefit pension schemes will have all but disappeared from the private sector within the next year or so. Barnett Waddingham emphasised that the gap could easily narrow if interest rates rise and returns increase to closer to normal levels.

The findings, from the Impact of Pension Schemes on UK Business report from actuarial consultancy Barnett Waddingham, show that the deficit has risen drastically as a proportion of UK plc profits in the last five years, and is now even higher than it was in the immediate aftermath of the financial crisis.

FTSE 100 firms are continuing to battle significant deficits, with the total deficit in FTSE 100 pension schemes at 31 December 2016 estimated to be £87 billion, up from £17 billion a year earlier.

It said that even if profits were to remain steady for the next three years, it would only take a 0.7% fall in bond yields for the deficit to actually exceed annual United Kingdom plc profits by 2019.

However, the actuaries said recent data suggesting years of austerity had seen gains in United Kingdom life expectancy grind to a halt could provide "welcome respite for companies". This trend may be particularly alarming for the 21 firms whose deficit now exceeds 10% of their market value.

The report added that one factor which could reduce the deficit in the coming years is mortality rates.

This fact which would provide "welcome respite" for company pension schemes, struggling to meet payouts.

An updated financial assessment to reflect the diminishing life prospects of retired United Kingdom employees would cut the aggregate liabilities of FTSE 350 companies by about £10bn, they said.

"Comparing the pension deficit to profits is a simplification, but it helps to put the scale of the challenge into context".

The report claimed that in 2015 almost a third of FTSE 100 companies could have used the cash they spent on shareholder dividends to eliminated their pension deficits.

He added: "The deficit is essentially the difference between two much bigger numbers, and a few gentle economic triggers could completely change the picture".

This is despite many firms in the FTSE 100 taking steps to plug funding gaps, such as by closing schemes to new employees or to future accrual, and increasing cash contributions by more than £4bn over the year.

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