FTSE 100 Pension Plans Reach Surplus for First Time in 10 Years

As of the end of 2017, the FTSE 100 pension plans were in surplus for the first time since 2007, according to a report from UK consulting firm Lane Clark & Peacock (LCP).

LCP estimates the overall accounting position improved to 101% in 2017 from 95%, turning a £31 billion ($41.4 billion) deficit into a £4 billion surplus by the end of the year. It also said it estimates that the surplus figure has improved even more since the end of the year to over £20 billion at the end of April.

“That’s good news, but funding deficits remain and company directors are under ever-increasing pressure to pay more contributions,” Phil Cuddeford, LCP’s head of corporate consulting, said in a release. “They need to balance this demand against the risk of adverse consequences on distributable reserves, credit ratings, or regulatory capital in light of the accounting surplus.”

The funding of the FTSE 100 pensions is ahead of the rest of the UK’s corporate pension plans, however, those have also steadily progressed toward a surplus. The funding level of the 5,588 corporate UK pensions plans in the Pension Protection Fund’s (PPF) 7800 Index rose to 95.1% at the end of April, from 93.1% at the end of March.

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The LCP report attributed the funding improvement to three main reasons: increased pension contributions, strong investment growth, and updated life expectancy and inflation assumptions. It said that UK companies contributed £13 billion, which is more than twice the cost of the extra benefits members earned during the year. It also said companies adopted new methods to set discount rates to largely negate worsening financial conditions.

It also said the continuing declines in life expectancy assumptions are good news for company balance sheets, and for companies looking to secure benefits with an insurer, as insurers reflect these trends in their pricing.

“We show clear evidence that companies are increasingly using more sophisticated ways to set the most important assumption, the discount rate,” said the report. “Over the last two years, we estimate companies have used this to improve balance sheets by around £15 billion.”

LCP’s report cited the recent collapses of retailer BHS and facilities management company Carillion as having increased the focus on whether companies are skimping on their pension contributions in order to reward shareholders with dividends. It said that since the two companies failed with “significant pension black holes,” there has been a “quantum step-up” in scrutiny.

According to the report, dividends totaled more than six times the amount companies paid to pension plans in 2017, compared to four times in 2016.

“Despite The Pensions Regulator’s guidance for companies to pay contributions as quickly as is ‘reasonably affordable,’ traditional thinking has often been that strong companies can pay deficits off over longer periods—resulting in lower contributions each year,” said the report. “The fall of BHS and Carillion are all challenging this mindset.”

According to the report, companies continued to take action to manage their pension risk in 2017, with closures to future accrual, liability management exercises, insurance transactions, and investment de-risking. The proportion of assets invested in equities is now less than 25%, compared to more than 60% 15 years ago, said the report.

However, the report warned that the surplus status of the FTSE 100 pension funds could be fleeting.

“On the odd occasions there has been a combined surplus in the last 15 years, market conditions have quickly wiped it out,” said the report. “It remains to be seen if the current surplus is here to stay.”

Tags: Carillion, FTSE 100, Lane Clark & Peacock

The Pension Benefit Guaranty Corp. (PBGC) is in such financial dire straits that members of failed multiemployer pension plans would likely receive only one-eighth of the minimum benefits they are supposed to be guaranteed, warned PBGC Executive Director Thomas Reeder during a congressional hearing last week.

During the hearing before the joint House-Senate Select Committee on Solvency of Multiemployer Plans, Sen. Sherrod Brown (D-OH) questioned Reeder about what would happen if plans fail, and PBGC insurance kicks in without help from Congress.

“If you do nothing today, workers and retirees will continue [to] lose the benefits that have been promised to them,” said Reeder. He said the administration has laid out a proposal for increased premiums to pay the benefits that have been promised. But he said “the longer we wait to put that money into the PBGC, the more that money will have to be over a shorter period of time.”

The PBGC acts as an insurance company for multiemployer pension plans, but it is severely underfunded. As a result, the more plans that fail put an increasing strain on the organization’s finances.

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When asked if the PBGC would be able provide the minimum guaranteed benefit to failed plan members without congressional action, Reeder said “no,” adding that the PBGC would have to cut it to about one-eighth the minimum benefit, or less.

“If they’re making $8,000 in guaranteed benefits today, they’d get less than $1,000,” said Reeder.

Reeder said that without help from Congress, propping up the PBGC could cost taxpayers $16 billion over 10 years, and that would only keep the organization going for another 20 years.

When asked about the impact on the withdrawal liability for businesses, Reeder said he didn’t believe most plans facing insolvency in the near future would terminate, so he doesn’t expect a mass withdrawal.

“But they will have a continuing obligation to make a contribution to a plan that has already become insolvent,” he said, “so they’re making contributions for active workers for benefits that they will never get.”

Although the line of questioning centered on multiemployer pension plans, their struggles could also become a burden for single-employer pension plans, even though the PBGC’s single-employer pension insurance is on much more stable financial footing.

A 2017 issue brief published by the American Academy of Actuaries that offered ways the PBGC could bolster its struggling multiemployer program proposed combining the program with its single-employer program.

“The single-employer program is currently in a stronger financial position than the multiemployer program,” said the brief. “However, this approach would generate potential inequities, as it adds new risks to single-employer plan sponsors and participants.”

It also warned that due to fundamental differences in how the single and multiemployer programs operate, combining the funding “could put stress on the single-employer system and further erode support for defined benefit plans.”

Tags: Multiemployer Pension Plans, PBGC, Thomas Reeder