FTSE 100 DB Plan Deficits Fall 32% in 2017

The aggregate deficit of the FTSE 100 defined benefit pension plans fell 32% to £46 billion ($64.6 billion) for the year ended June 2017, thanks to favorable market conditions and large sponsor contributions, according to JLT Employee Benefits.

JLT said that the FTSE 100 pension portfolios fared better within a rising market, particularly those that continue to run very large mismatched equity positions. It said that because of the bond-like nature of pension liabilities, plans’ allocation to bonds can provide a useful proxy for the level of mismatching currently within portfolios. The average plan asset allocation to bonds rose to 63% from 61% the previous year.

“Market conditions have certainly been more helpful to scheme portfolios over the past year, with strong equity market returns providing a much-needed boost to investment performance,” said Charles Cowling, director of JLT Employee Benefits. “Sponsors too, in some cases, have stepped up to the mark and taken the decision to inject cash into their schemes as part of their wider approach to managing balance sheet risks.”

According to JLT, although more than half of UK’s FTSE 100 companies continued to pay significant contributions in a move to reduce their deficits, their pension liabilities still rose 21.2% to £710 billion, from £586 billion for the same period the previous year. Total contributions during the period increased 65% to £10.8 billion, from £6.4 billion the previous year; however, this increase was largely due to the activities of a small number of pension sponsors.

Cowling said that while it is positive to see a reduction in the total deficit, “it is important to emphasize that this number masks the materially worse funding position likely to be reported by upcoming actuarial valuations.”

JLT said that pension sponsors are increasingly withdrawing defined benefit provisions, and closing pensions to future accrual due to a combination of low interest rates, increasing life expectancies, and aggressive regulation. It said that only 19 FTSE 100 companies are still providing defined benefits to a significant number of employees.

Meanwhile, dividends continue to outpace total deficit contributions as the FTSE 100 companies had an aggregate of £73 billion of dividends relative to a deficit of £43 billion. As a result, 42 companies could have settled their pension deficits in full, with a payment of up to one year’s dividend, according to JLT.

“The tension inherent between fund scheme deficits, delivering shareholder value and holistic covenant strength has been brought into sharp focus over recent months by the high-profile collapse of Carillion and BHS,” said JLT.  “The high ratio of total dividends paid versus the total disclosed scheme deficit … highlights the missed opportunity for sponsors to substantially pay down their deficit and contribute towards further de-risking measures.”

The distribution of liabilities across index constituents remains uneven, as the consultancy group cited 17 large, legacy businesses having reported pension liabilities of more than £10 billion, while nine companies—typically more recent additions to the index—have no liabilities.

“Progress has not been universal across FTSE 100 pension schemes and remains the story of the few rather than the many,” said Cowling. “Too many are burying their heads in the sand and continuing to prioritize the short-term needs of shareholders over their long-term obligations to scheme members.”