Research from JLT Pension Capital Strategies (JLT PCS), which specialises in corporate consulting and pension scheme de-risking, reveals that the total deficit of FTSE 100 defined benefit (DB) pension schemes has improved by £8 billion from the position 12 months ago, resulting in the total deficit of FTSE 100 pension schemes at 30 December 2012 estimated to be £50 billion.

The trend towards de-risking continues to gather pace and, despite the equity rally, pension funds are increasing their bond weighting. The average pension scheme asset allocation to bonds now stands at 56%, up from 50% a year ago and 33% six years ago. A number of companies are reporting significant individual changes to the investment strategies of their company pension scheme: three FTSE 100 companies changed their bond allocations by more than 10%. The decline of DB pensions continues, and we estimate the underlying reduction in ongoing DB pension provision to be approximately 15% in the last 12 months alone.

The research also shows that year on year there has been a reduction in deficits, spurred on in part by the equity market rally, but also the large capital injections made by companies into their schemes. However, liabilities continue to rise; in the last 12 months, the total disclosed pension liabilities of the FTSE 100 companies have risen from £444 billion to £475 billion. Last year saw total deficit funding of £12.7 billion, up from £11.3 billion from the previous year. BT led the way with a massive deficit contribution of £1.9 billion, but 63 other FTSE 100 companies also reported significant deficit contributions in their most recent annual report and accounts.

Only 16 companies disclosed a pension surplus in their most recent annual report and accounts; 71 companies disclosed pension deficits. However, JLT Pension Capital Strategies estimates that only 13 companies would disclose a surplus if they had a year end of 31 December 2012.

The major concern is the significant number of FTSE 100 companies where the pension scheme represents a material risk to the business. Five FTSE 100 companies have total disclosed pension liabilities greater than their equity market value; this is, however, a reduction from nine companies as at September 2012. The latest figures show International Airlines Group’s total disclosed liabilities to be almost five times their equity market value, despite an improvement on the position in the previous quarter. BAE Systems and BT have disclosed pension liabilities that are more than double their equity market value.

Charles Cowling, Managing Director of JLT Pension Capital Strategies, comments:

Piles of coins by Ian Britton -

Piles of coins by Ian Britton –

Whilst the overall deficit position of the FTSE 100 has improved slightly on the previous year, a £50bn deficit still represents more than the whole 2013 UK defence budget and, consequently, it is imperative that companies continue to seek new ways of plugging these large funding gaps.

What is clear is that the so-called ‘great rotation’ out of bonds into equities is a retail investment phenomenon and that the inverse rotation is very much at work across UK pension schemes. We could now be seeing the end of the George Ross-Goobey led cult of pension scheme investment in equities, as the pressure to find high-yielding fixed-income investments mounts. However, as yields continue their downward trajectory on the back of continued investor demand (despite the announcement from the Bank of England of no change to the Quantitative Easing programme) UK pension funds need to find a way to diversify away from traditional methods of risk-averse investment through corporate bonds and gilts. As a matter of urgency the Government must develop mechanisms that provide low-risk opportunities with an attractive yield – bond-like structures, such as asset-backed securities or special “infrastructure bonds” which would benefit pension schemes at the same time as providing funding for much-needed PFI projects.”

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