22 June 2015: The total deficit in FTSE 250 defined benefit (DB) pension schemes at 31 December 2014 is estimated to be £12 billion, a deterioration of £5 billion from the previous 12 months, according to JLT Employee Benefits.
Just 11 companies (i.e. just 5% of the FTSE 250) 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). This is part of a broader trend of significant decline in ongoing DB pensions as employers seek to contain their soaring cost.
In April, Tesco took steps towards ending its DB scheme to future accrual and in May, Tata Steel announced plans to close its DB scheme despite fierce resistance from its employees. Morrisons has also consulted on the closure of their DB pension scheme and Manx Telecom has closed their DB scheme in an attempt to curtail deficits.
Last year saw total deficit funding of £1.3 billion, up from £1.2 billion the previous year. Phoenix Group led the way with a deficit contribution of £100 million, but 37 other FTSE 250 companies also reported significant deficit funding contributions in their most recent annual report and accounts. Six out of the 10 FTSE 250 best funded schemes were financial services firms, which JLT Employee Benefits says may reflect their better understanding of pension risks / liabilities.
The average pension scheme asset allocation to bonds is 52%, down from 55% in the previous year, but up from 49% five years ago. In 22 companies, pension scheme asset allocation to bonds has changed by more than 10%.
A significant number of FTSE 250 pension schemes represent a material risk to their sponsors, with 16 FTSE 250 companies having total disclosed pension liabilities greater than their equity market value. For example, FirstGroup has total disclosed pension liabilities of almost four times its equity market value.
Only 37 companies disclosed a pension surplus in their most recent annual report and accounts; 103 companies disclosed pension deficits. However, we estimate that 20 companies would disclose a surplus if they had a year-end of 31 December 2014.
In the last 12 months, the total disclosed pension liabilities of the FTSE 250 companies have remained at £71 billion. A total of 20 companies have disclosed pension liabilities of more than £1 billion, the largest of which is FirstGroup with disclosed pension liabilities of £4.6 billion. A total of 158 companies have disclosed pension liabilities of less than £100 million, of which 109 companies have no defined benefit pension liabilities.
Charles Cowling, Director at JLT Employee Benefits, comments: “The challenges of escalating pension costs and huge pension deficits are well documented for those companies with DB provisions in the Private Sector.
“With this year's introduction of the new "Freedom and Choice" changes for DC schemes (making such schemes a lot more attractive) and with next year's cessation of contracting-out (and the creation of a new Single Tier State Pension), any remaining reasons to hang onto DB pension provision in the Private Sector have all but disappeared.
“DB pensions have become too expensive, too risky, and amongst UK Private Sector companies, are no longer part of HR strategies for employee recruitment and retention. Sadly, we expect that within 12 months virtually all DB pension provision in UK companies will have ceased.”
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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.