Total deficit in FTSE 100 schemes worsened by £12 billion over the last 12 months to £52 billion

Research from JLT Employee Benefits (JLT EB) reveals that the pension schemes of the FTSE 100 companies are continuing the shift from equities into bonds despite the recent rally in the equity market.

Fresnillo is the latest company to report a big switch out of equities, with bond allocations increasing by 25% over the 12 months to 30 September 2013. Another nine FTSE 100 companies increased their bond allocation by more than 10%. A total of 59 FTSE 100 companies have more than 50% of pension scheme assets in bonds. Overall, the average pension scheme asset allocation to bonds is 56%, up from 36% six years ago.

The research, which analyses the funding position of FTSE 100 defined benefit (DB) pension schemes, also found that their combined aggregate deficit has deteriorated by £12 billion to £52 billion over the 12 months to 30 September 2013. Meanwhile, the total disclosed pension liabilities of the FTSE 100 companies have risen from £474 billion to £532 billion.

Six FTSE 100 companies have total disclosed pension liabilities greater than their equity market value, which could have a significant impact on corporate decision-making in the boardroom. Total disclosed pension liabilities are almost three times the equity market value of International Airlines Group, whilst BAE Systems and BT has disclosed pension liabilities that are nearly double its equity market value. BAE Systems have a disclosed pension deficit of more than a third of their equity market value. A further 11 companies have disclosed pension deficits bigger than 10% of their equity market value.

In total, the amount contributed to FTSE 100 company pension schemes was £15.8 billion, down from £18.1 billion in the previous accounting year. This is more than the £6.5 billion cost of benefits accrued during the year. It therefore represents £9.3 billion of funding towards reducing pension scheme deficits. This is a decrease on the previous year’s deficit funding of £12.5 billion.

Charles Cowling, Managing Director, JLT Employee Benefits, comments:

Companies and trustees are continuing to switch pension assets out of equities into bonds despite a bull market in equities and a slight fall in bond prices in 2013, reflecting a long term trend in pension asset allocation in the UK. The tapering of quantitative easing in America could precipitate this migration further in 2014.

Pension Nest Egg-2We suspect this move from equities towards bonds is supported by a number of companies starting to use liability-driven investment (LDI) strategies and we expect a number of schemes to ready themselves for a buy-out as there is higher pressure for pension schemes to de-risk. Whilst shareholders are keen to keep under control the increasing accounting volatility caused by the colossal size of pension schemes, trustees and regulators view buy-outs as a general, effective risk management tool. Overall, many pension schemes are now entering maturity or closing phase, so their trustees are beginning to target ‘end-game strategies’.

Whilst some companies, such as BAE Systems, have paid huge cash contributions, most companies have precious little spare cash. Widening deficits, and perhaps weaker perceived sponsor covenants, will inevitably lead to Trustees requesting larger deficit-correcting contributions from sponsoring employers.

This year we expect to see a trend towards companies looking at alternative sources to fund their pension schemes. We have already seen some companies make use of property partnership deals to help tackle their pension deficits e.g. Marks & Spencer, Sainsbury’s and Whitbread have used a total of £2.5 billion worth of property assets in such deals. We could see more of these unusual funding sources in 2014.”

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