THE FTSE 100 AND THEIR PENSION DISCLOSURES

29 August 2017

A quarterly report from JLT Employee Benefits

EXECUTIVE SUMMARY

  • The total deficit in FTSE 100 pension schemes at 31 December 2016 is estimated to be £87 billion. This is a deterioration of £17 billion from the position 12 months ago.
  • Only 53 FTSE 100 companies are still providing more than a handful of current employees with DB benefits (i.e. ignoring companies who are incurring ongoing DB service costs of less than 1% of total payroll). Of these, only 21 companies (i.e. less than a quarter of the FTSE 100) 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).
  • There continues to be significant funding of pension deficits. Last year saw total deficit funding of £11 billion, up from £6 billion the previous year. Royal Bank of Scotland led the way with a deficit contribution of £4.5 billion (net of ongoing costs), but 50 other FTSE 100 companies also reported significant deficit funding contributions in their most recent annual report and accounts.
  • IFRIC14 is an important part of the IAS19 framework and provides guidance on the recognition of surpluses and the impact of minimum funding requirements. This standard is currently being reviewed by the IASB and the proposed changes could have huge implications for UK companies – potentially increasing the pension liabilities of UK companies by tens of £billions.. RBS ave already anticipated these changes and as a result have shown a massive increase in their IAS19 provision by including an “irrecoverable surplus” of £5.3billion.
  • 41 FTSE 100 companies could have settled their pension deficits in full with a payment of up to one year’s dividend, 11 companies would need a payment of up to two years’ dividends to settle their pension deficits in full and 14 companies would need a payment of more than two years’ dividends in order to settle their pension deficits in full.
  • There are a number of companies reporting very significant individual changes to investment strategies. 3 FTSE 100 companies changed their bond allocations by more than 10%.
  • The average pension scheme asset allocation to bonds has increased from 61% to 62%. Ten years ago, the average bond allocation was only 34%.
  • There are a significant number of FTSE 100 companies where the pension scheme represents a material risk to the business. 10 FTSE 100 companies have total disclosed pension liabilities greater than their equity market value. For International Airlines Group total disclosed pension liabilities are triple their equity market value. For BAE Systems the total disclosed pension liabilities are almost double their equity market value.
  • Only 24 companies disclosed a pension surplus in their most recent annual report and accounts; 66 companies disclosed pension deficits.
  • In the last 12 months, the total disclosed pension liabilities of the FTSE 100 companies have risen from £586 billion to £681 billion. A total of 16 companies have disclosed pension liabilities of more than £10 billion, the largest of which is Royal Dutch Shell with disclosed pension liabilities of £73 billion. A total of 20 companies have disclosed pension liabilities of less than £100 million, of which 10 companies have no defined benefit pension liabilities.
  • If pension liabilities were measured on a “risk-free” basis rather than using a AA bond discount rate, the total disclosed pension liabilities of the FTSE 100 would increase from £681 billion to £795 billion, and the total deficit at 31 December 2016 would be around £165 billion.

The appendix at the end of this report contains a full list of all the FTSE 100 companies analysed and their relevant pension disclosures.

The full report includes the following sections:

Funding position and commentary | Investment mismatching and commentary | Size of pension scheme and commentary | Significance of the pension scheme in the boardroom and commentary | Impact of the pension scheme on the company’s share price and commentary | Contributions paid into pension schemes and commentary | Appendix of full list of all the FTSE 100 companies analysed and their relevant pension disclosures

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Report authors:

Charles Cowling, Managing Director | T: +44 (0) 161 242 5388 | E: charles_cowling@jltgroup.com

Murray Wright, Consultant | T: +44 (0) 131 456 6868 | E: murray_wright@jltgroup.com