FTSE 100 Pensions’ Bond Allocation Nearly Doubles in Decade

Plans look to lock in gains by shifting to fixed income investments.

The aggregate deficit of the defined benefit pension plans of the FTSE 100 companies fell by £36 billion ($47.1 billion) for the fiscal year that ended June 30, 2018, spurring many plan sponsors to lock in gains by moving into bonds, according to consulting firm JLT Employee Benefits.

During the 12 months to June 30, FTSE 100 plans’ allocation to bonds rose to 66% from 63% a year earlier, continuing a decade-long shift to bond-dominant portfolios from equity-dominant ones.

According to JLT, the average fixed income allocation for the FTSE 100 corporate pension plans was just 35% 10 years ago. And among the FTSE 100 plans, 68 now have more than 50% of portfolio assets allocated to bonds, and 10 plans have more than 90% of their assets invested in bonds. However, it also said that investment mismatching still persists among a minority of FTSE 100 plans that continue to maintain large equity positions, as five of the companies have less than 25% of their plans’ assets allocated to bonds. 

“Pension schemes made good progress in 2018 and it is encouraging to see a significant improvement in funding levels and schemes’ proactive efforts to lock in gains,” Charles Cowling, JLT Employee Benefits’ chief actuary, said in a release. “By moving into bonds, schemes are more closely mirroring the profile of liabilities arising, thereby reducing volatility in funding levels.”

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JLT also said that pension plans committed “significant capital” to further improve their funding levels, as four UK blue chips paid more into their pensions than they declared in dividends to shareholders during 2018. And 51 of the FTSE 100 sponsors reported major deficit funding contributions in their most recent annual reports and accounts, as companies continued to offset balance sheet risks with cash injections.

The total of £14.3 billion that was paid into pensions during the year was down from £17.3 billion in the previous accounting period. However, this figure was £6.4 billion more than the cost of benefits accrued during the year, and therefore represented £7.9 billion of funding toward reducing pension deficits, said JLT.

During the fiscal year, the total disclosed pension liabilities of FTSE 100 companies fell to £683 billion from £710 billion at the same time the previous year. Despite the reduction, JLT said pensions continue to represent a material risk to several of the UK’s largest companies. For example, 18 of FTSE 100 companies have disclosed pension liabilities greater than £10 billion, led by Royal Dutch Shell’s £74 billion in liabilities, while 22 companies have disclosed pension liabilities of less than £100 million, and 13 companies have no defined benefit liabilities.

“Limiting volatility in pension schemes may prove crucial to UK companies over the next few months, a period which could bring untold challenges to even the largest, most resilient companies,” cautioned Cowling. “While constituents with a significant proportion of revenues derived overseas will be relatively sheltered from the potentially negative currency implications of a no-deal Brexit, domestically-focused companies have a tough road ahead of them.”

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