The survey found that the combined pension deficit of the 56 companies in the FTSE 100 that disclosed a deficit at their 2015 year-end was £42.3bn while those same companies paid dividends totalling £53.0bn, some 25% higher in 2015, while they paid around five times as much in dividends as they did in contributions to their defined benefit pension schemes. The average FTSE 100 company’s pension liability was found to be 34% of its market capitalisation and its pension scheme deficit to be 4% of its market capitalisation.
Defined benefit contributions rose in 2015 £13.3bn up from £12.5bn in 2014 but less than the £14.8bn contributed in 2013. The LCP report also found that FTSE 100 companies are putting more than twice as much money into defined benefit (DB) pensions as they are into defined contribution (DC) pensions – £13.3bn compared with £6.0bn – and this gap has grown in recent years.
Bob Scott, LCP’s senior partner and report author, said: “The collapse of BHS and the potential sale of Tata Steel UK, both with underfunded pension schemes, have highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company. Companies with large deficits may see pressure from the Pensions Regulator on their dividend policy in light of the Select Committee’s report into BHS.”
LCP estimate that at 31 July 2016 the combined FTSE 100 accounting deficit in respect of UK pension liabilities was £46 billion, compared to £25 billion a year earlier. Pension deficits have risen even further during August however following the recent cut in base rate and the extension of the QE programme by the Bank of England. By 9 August, LCP estimates that FTSE 100 companies had pension deficits totalling £63bn.
According to LCP, allowing companies to alter the increases applying in their pension scheme to the Consumer Price Index (CPI) would reduce FTSE 100 pension liabilities by around £30bn. If companies had only to provide the minimum level of pension increase set out in legislation, FTSE 100 pension liabilities would be reduced by up to £100bn.
“The government should end the uncertainty – the legal lottery – by allowing companies to move from RPI to CPI, subject to safeguards,” said Bob Scott. “The safeguards are important as they should not automatically allow a profitable company with a large pension surplus to increase that surplus by reducing benefits. They could, however, provide relief to a company with a large deficit where the trustees agreed it was in the members’ interests for benefits to be reduced.”