The total IAS19 deficit of FTSE 100 companies was GBP37 billion at the end of June 2014, compared to GBP43 billion a year ago, according to LCP’s 21st annual Accounting for Pensions report.
This reflects total assets of GBP475 billion versus liabilities of GBP512 billion.
LCP’s report reveals that despite an increase in pension scheme membership due to auto-enrolment, pension contributions paid by FTSE 100 employers have fallen from GBP21.9 billion in 2012 to GBP20.2 billion in 2013. Even so, FTSE 100 companies have pumped over GBP100 billion in to their pension schemes over the past five years.
George Osborne introduced major changes to pensions in the 2014 Budget by giving full flexibility in how funds built up in defined contribution (DC) plans are drawn. There is already evidence that this has encouraged greater pensions saving. The budget measures will also impact defined benefit schemes, initially as people transfer their benefits to defined contribution (DC) schemes to take advantage of the reforms.
LCP partner and report author Bob Scott says: “In some ways the pensions outlook is as bright as it has been for many years. The 2014 budget makes saving for retirement more attractive for individuals. Economic growth brings investment opportunities for pension schemes and their sponsors. And increased capacity in the insurance market shows companies that there is an end in sight to their DB pensions issues.”
There are still challenges for government before the budget changes can be implemented in full. One of the biggest is determining how the free guidance for all DC pension scheme members at the point of retirement will work.
In the last year, the inflation measure “RPIJ” has been designated as a National Statistic, raising the possibility that pension schemes could use RPIJ in place of RPI to index benefits. It is early days yet but a switch from RPI to RPIJ on the scale seen in 2010 when the government adopted CPI for statutory increases could save FTSE100 companies up to GBP20 billion on their pensions bill.
Last year’s report showed a small increase in the proportion of FTSE 100 pension scheme assets invested in equities. However, this year the long-term trend of switching into assets that more closely match pension liabilities was seen again, as the equity allocation fell. A number of companies have disclosed investment ‘triggers’ with assets being automatically moved from equities to bonds if the funding level of the pension scheme increases. The trend toward bonds and away from equities therefore looks set to continue.
Other developments could affect the way the UK’s largest companies run their pension schemes. The referendum on Scottish independence could cause a headache for some companies as a ‘yes’ vote may result in more stringent funding requirements. It could also call into question the effectiveness of Scottish Limited Partnerships, which have proved popular amongst the FTSE100 when providing security to their pension schemes.
And, with the General Election next May, LCP considers that whichever party comes to power, we are likely to see further changes to pension taxation.
Scott says: “This has been a remarkable year for pensions. Even before the budget, companies faced a period of upheaval as they came to terms with legislative changes introduced in the past four years. As our previous reports have shown, companies have made huge changes to their pension schemes in recent years. All the signs from our latest report point to the likelihood that we will see plenty more changes over the coming years as well.”