Difficult economic conditions, rising pension costs and increasingly aggressive pension regulations, are making it more and more difficult for companies to keep their defined benefit (DB) pension schemes open. According to JLT Employee Benefits (JLT EB), this could lead to a complete extinction of open DB schemes amongst FTSE 250 companies within a year.
JLT EB found that total disclosed pension liabilities of FTSE 250 companies have increased to a record £81 billion, as at 30 June 2015, up from £75 billion the year earlier. Attempts by many companies to stem the growth of their pension liabilities by closing DB pension schemes to new entrants and/or to all members have had little impact. Changes in economic conditions and increasing life expectancy have contributed to the spiralling growth in pension liabilities.
A total of 26 companies have disclosed pension liabilities of more than £1 billion, the largest of which is FirstGroup with disclosed pension liabilities of £4.91 billion. Although in the last 12 months, 155 companies have disclosed pension liabilities of less than £100 million. The vast majority of these (111 companies) have no defined benefit pension liabilities at all, which reflects the phasing out of UK corporate DB schemes.
As the significant decline in ongoing DB pensions continues, there remains a significant number of FTSE 250 companies where the pension scheme represents a material risk to the business. Indeed, 14 FTSE 250 companies have disclosed pension liabilities greater than their equity market value. While FirstGroup’s position is well known, with total disclosed pension liabilities greater than three times their equity market value, The Go-Ahead Group, Phoenix Group, Balfour Beatty and Carillion have all disclosed pension liabilities that are almost double their equity market value.
With the rise in liabilities, the overall funding position of FTSE 250 companies’ pension schemes has consequently worsened. The total deficit in FTSE 250 pension schemes at 30 June 2015 is estimated to be £12 billion, a deterioration of £3 billion from the previous 12 months.
Only 49 FTSE 250 companies are still providing more than a handful of current employees with DB benefits, ignoring companies incurring ongoing DB service costs of less than 1% of total payroll. Of these, only 11 companies are still providing DB benefits to a significant number of employees, defined as incurring ongoing DB service cost of more than 5% of total payroll.
JLT EB estimates that the underlying reduction in ongoing DB pension provision is almost 16% in the last year alone, after allowing for the impact of changes in assumptions and market conditions.
Only 28 companies, including Tullett Prebon, Henderson and Ladbrokes, disclosed a pension surplus in their most recent annual report and accounts; 111 companies disclosed pension deficits.
Several companies and trustees are continuing to switch pension assets out of equities into bonds. SPP Group is the latest company to report a big switch, with bond allocations increasing by 25%. The average pension scheme asset allocation to bonds is 56%, an increase on last year’s figure of 51%, and up from 48% five years ago. In 20 companies pension scheme asset allocation to bonds has changed by more than 10%.
Charles Cowling, Director, JLT Employee Benefits, comments: “The ongoing spend and service costs on DB pensions before any allowance for deficit spending is a burden that many boardrooms would like to remove altogether. The impact on corporate decision-making for those companies with significant pension schemes liabilities should not be underestimated.
“With spiralling liabilities and yet more adverse regulations coming into effect from April, such as new tax rules and the end of contracting-out, we believe that the majority of FTSE 250 companies will cease DB pension provision to all employees within 12 months.”
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About JLT Employee Benefits
JLT Employee Benefits is one of the UK's leading employee benefit providers offering a wide range of benefit and pension services, including administration, actuarial and pension consultancy, investment, Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSASs) administration, flexible benefits, healthcare, benefit communication and financial education.
JLT Employee Benefits employs over 2,200 professionals throughout the UK and in 2013 had revenues of £172m in UK & Ireland.
Pensions and employee benefits companies within the JLT Employee Benefits group of companies include: JLT Benefit Solutions Ltd, Profund Solutions Limited, JLT Wealth Management Limited, JLT Investment Management Limited and Independent Trustee Services Limited. JLT Employee Benefits is part of Jardine Lloyd Thompson Group plc.
About Jardine Lloyd Thompson Group plc
Jardine Lloyd Thompson is one of the world's largest providers of insurance and employee benefits related advice, brokerage and associated services. JLT's client proposition is built upon its deep specialist knowledge, client advocacy, tailored advice and service excellence.
JLT is quoted on the London Stock Exchange and owns offices in 39 territories with some 9,000 employees. Supported by the JLT International Network, it offers risk management and employee benefit solutions in 135 countries.