FTSE 100 pension schemes in best position in 20 years pre-pandemic

FTSE 100 companies’ pension schemes were in their best position for 20 years at the start of the coronavirus crisis, according to LCP’s latest Accounting for Pensions (AfP) report.

LCP estimated that by the end of March 2020 and the start of the coronavirus crisis, 70 per cent of the schemes were in surplus, with 60 per cent having reported an accounting surplus in their 2019 accounts.

But in April 2020, the drop in credit spreads and discount rates led to an increase in pension liabilities, with the report pointing out that discount rates sat at their lowest month end level on record on 30 April.

As a result, the proportion of FTSE 100 schemes with an accounting surplus had fallen back to below 60 per cent by the close of April.

LCP’s report pointed out that pension schemes escaped much of the market turbulence because their combined pension asset holdings are 60 per cent in bonds and only 20 per cent in equities, while the impact on pension funds was also reduced where liabilities were extensively hedged.

Despite this, between 10 March to 18 March, pension scheme liabilities on an accounting basis dropped by £150bn due to a dramatic increase in discount rates.

LCP partner, Jonathan Griffith, commented: “Before the economic earthquake of Covid-19, a large number of FTSE 100 pension schemes were in a relatively healthy position finally reaching calmer shores following the financial crisis of 2008, with most reporting a surplus in their company accounts.

“The pandemic has thrown all this up in the air as discount rates and asset values are impacted by the market volatility.”

The report notes that funding is “a different story” as funding assumptions and accounting assumptions are determined differently and liabilities on a funding basis are generally higher than those on an accounting basis.

Consequently, many companies might be showing an IAS19 surplus on their corporate balance sheets but are still paying contributions to remove a deficit on funding assumptions, a situation that the report said would have been “exacerbated” by coronavirus and recent market movements.

Barnett Waddingham associate and senior consulting actuary, Lewys Curteis, said: “It’s vital that companies and trustees understand how the funding of their scheme has progressed over recent months. The time for reactive crisis management is coming to an end, and across the world people are adjusting to the new normal.

“For pension schemes, this means looking to the future and, where necessary, re-adjusting long-term funding strategies to set out a clear path to the endgame. As the economic recovery kicks in, companies will be asked to play their part in restoring their scheme to a healthier position.”

The report also found that, between 2018 and 2019, the average pension contribution for FTSE 100 CEOs fell from 25 per cent to 20 per cent of basic salary, while the ratio of CEO to average staff contributions fell from four times to three times.

LCP partner, Helen Draper, said: “The overall generosity of CEO pension packages has been reduced and the gap between CEO pensions and those of typical workers has also come down. But there is still a long way to go before the pension provision for those at the top and bottom of most FTSE 100 companies comes into alignment.”

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