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Pension contributions slashed by top companies

FTSE 100 businesses have shrunk the amount of money paid into their pensions by several billion pounds, LCP’s annual Accounting for Pensions Survey has found.

It revelaed that FTSE 100 firms paid £12.5bn into their schemes in 2014, some £2.3bn down from the £14.8bn paid in 2013 and the £16.8bn in 2012.

The most dramatic plunge was seen in the level of additional contributions made to plug deficits, with companies contributing just half the volumes they pumped in 2012.

The consultant  flagged that the increasing size of such schemes – where liabilities have doubled in a decade – is a grwoing risk for businesses – despite being a relatively manageable sum of £25bn, Professional Pensions reports.

Contributions

The main reason for the drop in contributions is that 2012 and 2013 were skewed by some huge one-off contributions from firms such as BT and Diageo.

Contributions last year were still above levels seen in 2007 and 2008. LCP senior partner Bob Scott says: “Companies have been pumping huge amounts of money into their schemes and in recent years that has started to ease off a bit.” 

But firms still contributed £12.5bn this year, with £7.1bn of this funding additional benefit accrual for current workers.

Shell and RBS were the only businesses that paid in more than £1bn in 2014, while Shell was the only company to contribute this much in 2013.

LCP found the move away from defined benefit continued, with just 36 firms offering traditional final salary benefits to any employees.

No firms offered final salary schemes to new joiners, while just three – Diageo, Johnson Matthey and Morrisons offer cash balance schemes. Tesco is the only firm to let new joiners enter a career average scheme, but has announced its intention to close it.

Scott says the end of contracting out in April 2016 will accelerate the decline of DB, while any move to get rid of upfront tax relief on contributions would kill it off completely.

Record liabilities

Despite these closures, and a string of liability management exercise, LCP warns that falling corporate bond yields have driven pension liabilities to an all time high.

The combined liabilities of blue chip firms stood at £553bn at the end of January 2015.

Scott says: “Since January 2005, we estimate that the total pension liability of FTSE 100 companies has almost doubled. Other things being equal, this increases the risk that these schemes present to their sponsoring companies.”

LCP calculates the ten companies with the largest schemes had combined liabilities of nearly £350bn and the ten companies with the largest pension deficits had a combined shortfall of nearly £40bn.

The firm says there is a 10% chance that those deficits could increase by at least a further £25bn over the next 12 months.

The average FTSE 100 pension liability was 35% of market capitalisation, compared to 36% in 2013, but pension schemes still pose a very significant risk for certain companies. For example, LCP calculates International Airlines Group’s accounting liabilities are more than double the size of the company. 

But the report shows some promising progress on closing deficits. The aggregate funding shortfall was cut by £12bn over the year.

Scott says: “The fact the headline deficit is not ballooning out of control is good news – at 25bn, as a percentage of the total liability, that’s quite manageable.”

 

But Scott expects changes to the UK corporate governance code will make firms give more information on the risk posed by their pension scheme.

He says: “As companies prepare their 2015 accounts, they will need to consider new requirements of the 2014 UK corporate governance code. This will require directors to include an updated ‘viability statement’ in their annual accounts, confirming their expectation that the company will be able to continue in operation, taking into account its current position and principal risks. Given pension risks may be one of the main risks for FTSE 100 companies, we expect the level of disclosure to be increased.”

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