The aggregate risk across FTSE 100 defined benefit schemes has fallen to its lowest level in four years, according to research that seeks to integrate covenant and investment risk.
The Worry Index, issued yesterday by covenant specialists Lincoln Pensions and parent Cardano, indicated that FTSE 100 scheme risk fell by 23.5 per cent compared to its position last year.
One in eight DB schemes in the index remain in a precarious position, however, with schemes in the retail sector especially under threat.
We should be less worried now than we were at any point in the last three years
Kerrin Rosenberg, Cardano
The index tests the robustness of these schemes under a stress scenario, such as a market shock, and their ability to meet obligations to members in these circumstances.
It classifies schemes with a deficit representing at least 30 per cent of the employer’s market capitalisation as being in the ‘worry zone’.
Trustees must stay vigilant
The index reflects the generally positive picture of DB scheme funding that currently exists.
JLT Employee Benefits’ index of private sector scheme health indicated a 100 per cent aggregate IAS 19 funding level across FTSE 100 companies as of September 30 2018.
Since 2015, the DB risk within FTSE 100 schemes has dropped by 9.4 per cent, according to the Worry Index.
Kerrin Rosenberg, chief executive at Cardano, argued against complacency from schemes where risk is lower, and urged them to establish contingency plans in order to protect their healthy positions.
“We should use this as an opportunity to fix the roof, so to speak, whilst the sun is shining,” he said.
The research attributes the surge in scheme resilience to increased covenant strength, investment returns and contribution levels.
“In aggregate, we should be less worried now than we were at any point in the last three years,” he added.
Retail schemes are vulnerable
The picture is less rosy in the UK’s embattled retail sector, which has recently witnessed a number of high-profile corporate failures.
In August, department store group House of Fraser entered administration, while department chain Debenhams is looking to restructure as the high street continues to struggle.
One in three FTSE 100 retailers with DB schemes sit in Cardano’s worry zone. Five of the 11 FTSE 350 employers with DB liabilities are also exposed, it says.
Paul McGlone, president of the Society of Pension Professionals, recognised that the sector has been under strain.
“They’ve got large pension schemes with businesses that tend to be shrinking, and [are] in a sector which is actually under quite a lot of financial difficulty,” he said.
McGlone, who is also a partner at Aon, was keen to highlight that schemes are now in a better position to withstand a potential economic downturn.
“We are undoubtedly closer to the next recession than the last recession, it’s been a long time, and we’ve got the uncertainty of Brexit around the corner,” he acknowledged.
“If our pension schemes in the UK as a whole are better placed to weather that storm than last time round, then that’s got to be a good thing.”
Scheme health still a matter of opinion
Companies in the oil and gas, and industrial sectors, are seeing an improvement in their ‘worry score’, while the consumer services, utilities and telecoms industries are faring worse. One expert was calm in his assessment of scheme funding, in response to the research.
“Of course it does concern me, but fundamentally, so what?” asked Richard Butcher, managing director at professional trustee company PTL.
The PLSA chair argued that variations in covenant strength do not change the “day job” of a fiduciary, and that deficit figures should be taken “with a pinch of salt”.
The subjective nature of deficit measurement provides for varying assessments of pension scheme health in the UK.
As of June 30, JLT Employee Benefits set the funding position of all UK private sector DB schemes at 98 per cent, on an accounting basis.
How should scheme liabilities be measured?
Analysis: The industry is unlikely to ever reach a consensus over the methods of scheme liability valuation, judging by the lively debate surrounding the subject.
First Actuarial, meanwhile, estimated the aggregate funding ratio of these schemes at 131 per cent on June 30, using its in-house ‘best estimate’ methodology.
“The problem may not be as bad as it appears because of the way that the deficit number has been calculated and the inherent conservativeness of that deficit number,” Butcher said.
