Over the past 10 years, FTSE 100 companies have funded their defined benefit pension plans with approximately £150 billion ($197 billion); however, the rising liabilities mean that the net accounting position has worsened, according to a recent report from investment consulting firm LCP.
LCP’s 24th annual Accounting for Pensions report, titled “£150bn to Go Backwards,” found that the continued rise in liability values, driven by falling bond yields, has meant that the combined accounting position has worsened from a multi-billion-pound surplus to a multi-billion-pound deficit over the past 10 years.
According to the report, asset values have risen, from approximately £350 billion in 2007 to more than £600 billion. However, during that same time, liability values have grown from £336 billion to £625 billion.
However, the survey found that the combined FTSE 100 accounting deficit in respect of UK pension liabilities had improved. It said the improvement in the net deficit since last year is due to strong returns on assets, and a record level of contributions, with FTSE 100 companies paying a total of £17.3 billion to their defined benefit plans last year. This is after contributing £13.3 billion in 2015, £12.5 billion in 2014, and £14.8 billion in 2013.
“The fall in bond yields over the last 10 years has led to a sustained rise in liability values, more than 85% since 2007, meaning companies have effectively paid £150 billion to go backwards,” said Bob Scott, LCP’s senior partner and author of the report. “Companies remain under increasing pressure to pay more into their schemes, and one can only hope that the contributions companies pay in future will have a bigger impact on the pensions’ deficit than in recent years.”
The report also found that despite pension liabilities totaling £625 billion, FTSE100 companies were still able to pay four times as much in dividends in 2016 as they did in contributions.
“All signs are that the Pensions Regulator will get tougher with companies who unduly prioritize their shareholders by giving them a bigger slice of the cake than the pension scheme gets,” said Scott.
Scott added that UK companies could be required to disclose even higher amounts on their balance sheets based on the International Accounting Standards Board’s (IASB) plans to amend IFRIC14, which governs the way companies are required to interpret the pensions accounting standard.
“Record levels of paid contributions and strong asset returns may have improved the overall accounting deficit figure, but this reduction could be short lived,” said Scott. “In particular, if the IASB persists with planned amendments to IFRIC 14, this could mean companies are required to disclose even larger pension liabilities on their balance sheets.”
Tags: FTSE 100, LCP, pensions, UK