Out-Law News | 31 Aug 2017 | 4:00 pm | 3 min. read
The combined pension liabilities of the companies listed on the FTSE 100 index increased by £95 billion to reach £681bn by the end of last year, even though only 53 of those companies are continuing to provide DB benefits to as little as 1% of their total workforce, according to JLT Employee Benefits. The position is similar across the FTSE 350, where the aggregate pension deficit increased by £12bn to reach £62bn last year, according to a separate report by actuarial consultants Barnett Waddingham.
According to Barnett Waddingham, the £62bn figure is the equivalent of 70% of the same companies’ total pre-tax profits, which were a combined £88.9bn last year. The proportion has increased dramatically from 25% over the past five years, and is higher than even the 60% of pre-tax profits recorded at the height of the financial crisis in 2009, the firm said in its report.
FTSE 100 companies contributed “significant funding” of around £11bn in total to their pension deficits last year, including a £4.5bn deficit contribution by Royal Bank of Scotland, according to JLT Employee Benefits. However, the firm said that 41 of the companies on the index could have settled their deficits in full with a payment of no more than one year’s dividend.
Earlier this year, The Pensions Regulator issued a warning that it would take action against firms found to be prioritising dividend payments to shareholders over the financial health of their pension schemes. It did so after finding that the amount that firms were allocating to deficit reduction had not risen in line with dividend payments, and after public outcry over the high-profile collapse of retailer BHS at a point when its pension scheme was £571 million in deficit.
The Conservative party pledged to consider the introduction of a new criminal offence for company directors who “deliberately or recklessly put at risk the ability of a pension scheme to meet its obligations”. It also proposed new powers to allow The Pensions Regulator to take action against those who mis-manage pension schemes. The proposals followed a green paper on DB pensions, published in February. However, there was no mention of pensions in the Queen’s Speech following the general election in June.
Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that the question of pensions was likely to continue to occupy parliament.
“With deficits in the FTSE 100 and elsewhere regularly grabbing the headlines, it’s time to think about how the security of the pension promise can be explained in an understandable way to pension savers,” he said. “Failure to do this risks creating ‘bad news’ around pensions, and may explain the lack of trust that many have in pension schemes. It also helps open the door to pension scammers, who encourage savers to transfer out of schemes due to worries about their pensions.”
“As we face increasing economic uncertainty trustees, The Pensions Regulator and parliament are likely to have a close eye on deficits and on the health of the employers who must fund them. Getting the balance right is far from easy, and is inevitably judged with the benefit of hindsight. Now more than ever, schemes need trustee boards with robust procedures in place to help them make good and timely decisions,” he said.
JLT Employee Benefits said that only 24 FTSE 100 companies disclosed a pension surplus in their most recent annual reports and accounts, while 66 companies disclosed pension deficits. In a "significant number" of cases, company pension schemes are potentially a "material risk" to the business - including for 10 companies whose total disclosed pension liabilities are actually greater than the equity market value of the company.
A technical change to the accounting standards for pension disclosures in company accounts is also set to impact on companies, according to JLT. IFRIC14 is an important part of the International Accounting Standards (IAS19) framework which provides guidance on the recognition of surpluses and the impact of trustee funding requirements in companies' annual accounts. The standard is currently being reviewed by the International Accounting Standards Board (IASB), and the proposed changes could potentially increase pension liabilities by tens of billions of pounds for some companies, JLT said.