UK Pension Funds Now Hold less than 20% in Equities

Report also says accounting rules change could cost FTSE 100 pensions $100 billion.

The UK’s largest corporate pension funds continue to shed their equity investments, dumping approximately £30 billion ($38 billion) worth in 2018, and for the first time investing less than 20% of their total assets in the stock market, according to research from investment advisory firm Lane Clark & Peacock (LCP).

The equity holdings by the pension funds of the FTSE 100 companies have been on a steady decline for years, and are down from 60% in 2002.

“In conjunction with this, the move away from defined benefit provision continues,” said LCP. The firm said that only 41% of the FTSE 100 provides any form of defined benefit pension to existing UK employees, down from 44% in 2017. And only two FTSE 100 firms—chemicals companies Croda and Johnson Matthey—still offer defined benefit pensions to new UK employees.

The research came from LCP’s annual report looking at FTSE 100 companies’ pension disclosures, which also said that FTSE 100 pension plan funding could fall by £100 billion if the International Accounting Standards Board changes its accounting rules as it has been suggesting.

“For some years, the International Accounting Standards Board has been proposing to tighten the rules,” said the report. “While proposals put forward in 2015 were dropped, new proposals may be put out to consultation in the coming year.”

LCP estimates that the potential new IFRIC14 rules, combined with the possibility of more prudent contribution requirements, could lead to a one-time balance sheet hit of more than £100 billion, compared with the impact of IFRIC14 on FTSE 100 companies’ 2018 accounts, which was only £13 billion.

International accounting standards limit the amount of a surplus arising from a defined benefit plan that an entity can recognize as an asset, and IFRIC 14 clarifies how an entity applies those requirements. IFRIC 14 also addresses the interaction between such minimum funding requirements and the limits on the measurement of the defined benefit asset or liability.

The report also looked into how guaranteed minimum pension (GMP) equalization was affecting the pension plans of the FTSE 100 companies.

An October High Court ruling confirmed that pension plans need to remove the inequalities that arise in benefits between men and women because of unequal GMPs earned between 1990 and 1997.  The judgment affects most companies with pension plans.

LCP said that the FTSE 100 disclosed an average estimated cost of correcting for gender inequality in GMP benefits of 0.4%. The firm said that while this is “considerably lower” than estimates had suggested, five FTSE 100 companies still took a hit to profits of £100 million or more due to GMP equalization.

The report also explored executive pensions, which have received criticism from national newspapers recently for being overly generous compared to the general workforce. LCP’s analysis of the 2018 disclosed accounts for the FTSE 100 shows average CEO pension contributions of around 25%, typically paid as a cash supplement.

Additionally, the report said approximately half of the FTSE 100 currently pay CEO pension contributions of 25% or above, and that only around 15% of the FTSE 100 companies pay CEO pension contributions or cash that are in line with their workforce.

“Relatively few companies have reduced contribution rates for their current CEOs,” said the report. “Standard Chartered and Lloyds did undertake changes but faced a significant amount of negative publicity and shareholder disquiet as the moves were seen as tokenistic.”

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