25 January 2019

  • The total estimated deficit across FTSE100 DB pension schemes improved by £36bn, to £1bn, over the year to 30 June 2018
  • Schemes’ allocation to bonds rose to 66%, up from 63% the year before and 35% 10 years ago
  • 8 FTSE100 companies switched more than 10% of assetS into bonds over the 12 month period
  • The total disclosed pension liabilities of FTSE 100 companies fell £27bn to £683bn, down from £710bn 12 months prior

FTSE 100 companies’ aggregate DB pension scheme deficit improved £36bn over the year to 30 June 2018, prompting many sponsors to lock in gains with a move into bonds. Eight FTSE 100 companies, including Severn Trent, Legal & General and Ferguson, increased their scheme allocation to bonds by more than 10% during the period. 

Over the 12 months to 30 June 2018, FTSE 100 schemes’ allocation to bonds rose to 66%, up from 63% a year earlier. In just a decade, schemes’ investment strategies have shifted from equity-dominant to bond-dominant portfolios; ten years ago, schemes’ average fixed income allocation was 35%. 68 FTSE 100 companies now have more than 50% of portfolio assets allocated to bonds. 

While 10 FTSE 100 schemes have more than 90% of assets invested in bonds, investment mismatching persists among a minority of FTSE 100 constituents, which continue to run large equity positions in their pension schemes. Five companies have less than 25% of assets allocated to bonds.  

Schemes committed significant capital to further improve scheme funding, with four UK blue chips paying more into their pension scheme than declared in dividends to shareholders over the year. More than half (51) of FTSE 100 sponsors reported major deficit funding contributions in their most recent annual report and accounts, as companies continued to offset balance sheet risks with cash injections. A total £14.3bn was paid into schemes during the year, down from £17.3bn in the previous accounting period. This figure was £6.4bn more than the cost of benefits accrued during the year, therefore representing £7.9bn of funding towards reducing pension schemes deficits. 

The total disclosed pension liabilities of FTSE 100 companies fell £27bn to £683bn, down from £710bn 12 months prior. Despite this reduction, pension schemes continue to represent a material risk to several of the UK’s largest companies. A total of 18 FTSE 100 companies have disclosed pension liabilities of more than £10bn, the largest of which is Royal Dutch Shell at £74bn; 22 companies have disclosed pension liabilities of under £100m and 13 companies have no defined benefit liabilities. 

Charles Cowling, Chief Actuary, JLT Employee Benefits, said: “Pension schemes made good progress in 2018 and it is encouraging to see a significant improvement in funding levels and schemes’ proactive efforts to lock in gains. By moving into bonds, schemes are more closely mirroring the profile of liabilities arising, thereby reducing volatility in funding levels. 

“Limiting volatility in pension schemes may prove crucial to UK companies over the next few months, a period which could bring untold challenges to even the largest, most resilient companies. While constituents with a significant proportion of revenues derived overseas will be relatively sheltered from the potentially negative currency implications of a no-deal Brexit, domestically-focused companies have a tough road ahead of them. 

“In the coming weeks and months, it will be important for trustees and their sponsors to batten down the hatches and ensure their scheme is positioned appropriately. For some, this may constitute a decision to take some risk off the table, while for others it may be case of building effective hedging strategies. Either way, in order protect the good progress of 2018, it is crucial that schemes remain alert to the situation as it evolves.”