Battle to plug deficits continues as FTSE 100 see £8bn deterioration

Companies have been striving to improve their DB scheme funding levels with the aim of eventually removing the plans from their balance sheets completely, as pension liabilities are an important component of corporate debt. 

The research, released this week by consultancy JLT Employee Benefits, looked at the most recent annual reports of all companies in the index and adjusted the figures to December 31 2013. 

Managing director Charles Cowling said there is more risk being run in company pension schemes than they are “comfortably able to manage”. 

“If you’ve got a big equity position you run the risk that your balance sheet is going to be all over the place, and within that there’s the possibility you could even theoretically become insolvent,” he said. 

Cowling added that the majority are managing their risks effectively, but that it was a delicate balancing act for sponsors. 

“Cash is a scarce commodity; you don’t want to put it into the scheme if you don’t have to,” he said. “But if you’re not going to fill deficits with cash, you’re going to have to fill them with investment returns and that means potentially taking more risk.” 

Celene Lee, senior manager in the pensions advisory team at consultancy PwC, said that while schemes are at different stages, the systems put in place have had an overall effect of reducing risk over recent years. 

“Although many schemes still have a significant amount of risk or return-seeking portfolios, there is now a stronger element of diversification within these portfolios, with pension schemes accessing alternative asset classes and smart beta funds, or seeking inflation-linking assets to match pension payments,” she said. 

The study found FTSE 100 pension schemes had an average 56 per cent allocation to bonds, which is unchanged from the previous year. This contrasts with the 6,150 schemes eligible to enter the Pension Protection Fund, which showed an average allocation of 44.8 per cent to gilts and fixed interest (as at March 31 2013).

Closing funding gaps

The amount sponsors contributed to their schemes’ deficits has fallen to slightly more than £16bn in 2013, down from £18.5bn the previous year. 

The report stated: “The large increases in the contributions seen in the last couple of years have ended.” 

The 10 largest surplus contributions into company schemes were as follows:

Source: JLT

Defence company BAE Systems made the largest surplus contribution totalling £908m, followed by pharmaceutical giant GlaxoSmithKline with £759m and Royal Dutch Shell with £611m. 

Cowling said the majority of FTSE 100 companies are signed up to making deficit contribution payments for the next 10 years or more.

“I don’t see the deficits going away particularly easily; we may get continued good investment returns combined with easing in interest rates but a lot of those deficits will take a lot of shifting,” he added. 

Simon Kew, director of pensions at employer covenant adviser Jackal Advisory, said while some cash-constrained employers with large DB deficits may be deemed insolvent on a balance sheet basis, so long as the employer is able to service debts as they fall due then it can still be “business as usual”.

“That doesn’t mean they can’t continue to trade successfully or recover in time but, broadly, if they are not forecast to remove the deficit in say 20 years, they could be classed as ‘balance sheet insolvent’,” he said. 

Lee added schemes should have a clear plan to manage risks and stick with it. 

“Making small steps is important,” she said. “Put in place a good governance framework for both trustees and sponsor, understand the dynamics of the pension scheme assets and liabilities, and work towards a plan one step at a time.”