FTSE 350 pension deficit halves

The FTSE 350’s pension deficit has almost halved from £62bn to £35bn in 18 months and now accounts for only 17% of total profits, according to actuarial consultancy Barnett Waddingham

Its analysis of the impact of defined benefit (DB) pensions on UK business reveals the position has improved drastically since the beginning of 2017, when the pension deficit was equivalent to 70% of the FTSE 350 companies’ total pre-tax profits.

This bucks the trend since 2011, as over this period, the deficit has as a proportion of profits steadily been increasing from a low of 25% to a peak of 70% in 2016.

Barnett Waddingham says this is the third year in a row that deficit contributions have increased, suggesting that the FTSE350 companies are stepping up their commitment to paying down DB pension scheme deficits, while another major driver for the fall in the aggregate deficit is the strong performance of pension scheme investment portfolios.

The report also found that the average deficit contribution paid by FTSE350 companies as a proportion of dividends remained at 10% in 2017.

It says The Pensions Regulator may be concerned that some 43 companies increased dividend payments to shareholders while at the same time reducing deficit contributions.  However, Barnett Waddingham argues that within this group there will be some companies who agreed to pay higher levels of contributions in the short term, which have now done their job in reducing the DB deficit. While the aggregate deficit has reduced, some companies face many more years of paying deficit contributions if they continue at current levels. The vast majority of companies disclosing an IAS19 deficit are still over ten years away from showing a DB surplus on their balance sheet.

In contrast, a significant number of companies are funding their pension schemes beyond the liability value disclosed in the accounts, due to the requirement to fund to the level determined by the trustees.  In aggregate this accounted for £4bn of additional company funding during the year to 31 December 2017.

Nick Griggs, partner at Barnett Waddingham, said: ‘The majority of companies ended 2017 with their DB scheme in a healthier state than the previous year. While this is positive news, it would not take much to tip the balance the other way. Our analysis suggests that a 0.5% fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE350 DB schemes up to £85bn.’

Impact of Pension Schemes on UK Business report is here

Report by Pat Sweet

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