The combined pension deficits of Britain’s biggest companies plummeted by almost two thirds in the past year according to the 18th annual Accounting for Pensions report by LCP, a leading firm of consulting actuaries.
The report, published, reveals that the aggregate FTSE 100 pension deficit now stands at £19bn, down from £51bn the previous year.
Key factors behind the lower deficit included the change in the inflation measure from RPI to CPI, continued high contributions from employers and stable economic conditions.
Bob Scott at LCP, said: ‘The gain for companies comes at a cost for many employees in the form of reduced pensions. The change to CPI is entirely dependent on the wording of each scheme’s rules and we’re seeing a ‘small print lottery’ under which a 45 year-old deferred pensioner in one scheme is unaffected yet a similar member in another scheme could stand to lose roughly a quarter of the value of their pension.’
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In the wake of a record year for contributions in 2009, pension scheme funding continued apace in 2010 albeit with £11bn of the £17bn paid into FTSE 100 schemes going towards reducing deficits rather than providing additional benefits for employees.
The reduction in the deficit also reflects positive asset returns over the year (at the same time as more stable corporate bond yields – and hence liability valuations – than in the previous two years.)
Bob Scott added: ‘The last 12 months have been a relatively benign period for pension schemes but it would be a mistake to think that the pensions challenge has gone away.
FTSE 100 companies still have about £400bn of UK IAS19 pension liabilities and the challenge remains not only to ensure that members receive what they were promised but to find ways to provide today’s young employees with decent pensions as final salary schemes decline.’
Other key findings of LCP’s Accounting for Pensions 2011 report include:
• Accounting charges will mean lower headline profits for most companies in 2013. Based on companies’ 2010 and 2011 accounts the total impact across the FTSE 100 is estimate to be a £3bn reduction in annual profits.
• The shift from equities to bonds has continued with investment in equities falling from 45 per cent to 42 per cent over 2010. This shift took place even though equities outperformed bonds over the year so if no action had been taken the proportion in equities would actually have increased.
• More and more companies are finding innovative ways, other than direct payment of cash contributions, to provide security to trustees, or to fund pension scheme deficits. .
• An emerging trend is for companies to enter into partnerships with their pension scheme trustees. In most cases companies have sold property to the partnership. This is then leased back to the company with the rental income generated by the partnership paid into the pension scheme. Marks & Spencer was one of the first companies to set up such an arrangement but Sainsbury’s, Whitbread and Kingfisher are among those that have also adopted this practice.
