The total deficit of FTSE 100 defined benefit (DB) pension schemes has deteriorated a further GBP22bn from the position 12 months ago, resulting in the total deficit of FTSE 100 pension schemes at 30 June 2012 standing at GBP55bn, according to research from JLT Pension Capital Strategies.
There are a significant number of FTSE 100 companies where the pension scheme represents a material risk to the business. Eleven FTSE 100 companies have total disclosed pension liabilities greater than their equity market value. International Airlines Group total disclosed liabilities are more than five times their equity market value and BAE Systems, BT and Royal Bank of Scotland have disclosed pension liabilities that are more than double their equity market value.
Only 16 companies disclosed a pension surplus in their most recent annual report and accounts; 69 companies disclosed pension deficits. JLT Pension Capital Strategies estimates that only 12 companies would disclose a surplus if they had a year end of 30 June 2012.
Moreover, companies are being forced to inject greater amounts of capital in order to support their schemes. Last year saw total deficit funding of GBP12.5bn, a significant increase of GBP1.4bn from the previous year. BT led the way with a massive deficit contribution of GBP1.9bn, on top of its regular contributions, and 61 other FTSE 100 companies also reported significant deficit contributions in their most recent annual report and accounts.
The significant decline in ongoing DB pension scheme continues; the underlying reduction in ongoing DB pension provision is approximately one third over the last three years – 15 per cent in the last 12 months alone, which reflects the decline in active membership of private sector DB schemes from 4.6 million in 2000 to an estimated 1.9 million in 2011 (source: ONS Occupational Pension Schemes Survey, 2011).
The average pension scheme allocation to bonds now stands at 56 per cent, up from 50 per cent a year ago and 33 per cent six years ago. A number of companies are reporting significant changes to the investment strategies of their company pension scheme: eight FTSE 100 companies changed their bond allocations by more than 10 per cent.
In the last 12 months, the total pension liabilities of companies within the FTSE 100 have risen from GBP441bn to GBP471bn. A total of 14 companies have disclosed pension liabilities of more than GBP10bn, the largest of which was Royal Dutch Shell with disclosed pension liabilities of GBP45bn. A total of 21 companies have pension liabilities of less than GBP100 million, of which 15 companies have no defined benefit pension liabilities.
Charles Cowling (pictured), managing director of JLT Pension Capital Strategies, says: “We have reached a stage where scheme deficits are widening substantially on an annual basis. Whilst large companies are making the effort to plug the gaps, rather like quantitative easing there will be a law of diminishing returns and one day the music will stop.
“Many companies are still running mismatched investment strategies and pension liabilities continue to grow. Eurozone worries show few signs of abating and increasing life expectancy continues to pile pressure on schemes and their sponsoring companies.
“As well as continued flows into bond allocation, this year we expect to see a trend towards companies looking at alternative sources to fund their pension schemes. We have already seen companies make use of property partnership deals to help tackle their pension deficits.”