FTSE 100 companies’ defined benefit (DB) pension schemes were in surplus for the fourth year in a row at the end of 2023, according to LCP.

The consultancy described FTSE 100 DB schemes being in surplus as the ‘new normal’, with the aggregate surplus sitting at £42bn at the end of December 2023.

Eight in 10 (80 per cent) FTSE 100 companies had an accounting surplus on their 2023 balance sheet.

LCP noted that while there had been a reduction of £25bn in the surplus in 2023 due to corporate bond movements, valuations for assessing the funding requirements of pension schemes had remained “broadly stable”.

The consultancy’s report highlighted that FTSE 100 DB schemes had over £250bn invested in bonds and cash, more than nine times the amount invested in equities, with this ratio having increased seven-fold over the past decade.

It also looked at executive pensions, finding that the average contribution rate for a FTSE 100 CEO was 10 per cent, down from 25 per cent in 2018.

Approximately one in thee FTSE 100 CEOs were receiving pension contributions in line with their employees, up from around one in seven in 2018.

Furthermore, the number of FTSE 100 CEOs receiving more than five times the average contribution rate paid to the wider workforce had fallen by around 90 per cent during the same time period.

LCP argued that, as in previous years, the assumptions connected to life expectancy and how it is projected to change going forward were the most challenging of the accounting assumptions to set objectively, and the area the consultancy had observed the greatest divergence from company to company.

One in five FTSE 100 schemes had undertaken an insurance transaction in 2023, according to LCP, with more schemes looking at their endgame options amid strong scheme funding.

LCP encouraged finance directors to incorporate accounting implications into strategic decisions early in the process and to better communicate what pensions accounting surpluses tell investors about the company.

It noted that different endgame options have different accounting implications, which could affect the sponsor’s debt ratios, or cause accounting volatility and other business impacts.

“From a financial perspective, relatively benign conditions mean pension surpluses that have emerged over recent years are beginning to look embedded,” commented LCP partner, Luke Hothersall.

“This relative stability presents an ideal platform for sponsors to review their pensions strategy, and in particular what ‘endgame’ they are targeting for their pension scheme.”

LCP partner, Phil Cuddeford, added: “For years, the direction of travel has been towards lower risk and ultimately getting the scheme off the corporate balance sheet by insuring it.

"There are now a wealth of endgame options and while accounting implications shouldn’t determine corporate pensions strategy, finance directors need to actively manage the messaging of accounting surpluses to the markets, rating agencies, and investors.”

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