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.
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.”