FTSE 100 defined benefit (DB) pension scheme sponsors could need to provide an additional £5bn in financial support to their schemes amid higher levels of inflation and potentially stricter rules under the The Pensions Regulator's (TPR) new funding regime, LCP has warned.

Analysis of Q3 FTSE 100 pension positions by the firm showed that the combined IAS19 surplus stood at £50bn at 30 September 2021, highlighting sustained recovery and improvement post pandemic.

However, it also found that whilst 10 FTSE 100 companies currently have an IAS19 deficit, 32 companies would be in deficit under TPR's new funding regime.

This could require an additional £5bn pa of deficit recovery contributions (DRCs) to plug the gap, including over £1bn pa of contributions for companies disclosing a surplus in their corporate accounts.

In addition to this, the firm warned that sharp rises in inflation seen over recent months could flow through to higher increases granted to the majority of schemes, with September’s inflation figures expected to be “very important” for DB pension schemes.

According to the analysis, if current trends persist, rising inflation could potentially increase FTSE 100 pension liabilities by up to £10bn, although LCP clarified that most schemes will be protected to an extent by inflation-linked assets.

Commenting on the findings, LCP partner, Jonathan Griffith, said: “It’s good news that we are seeing sustained accounting surplus figures and the volatility of 2020 is now hopefully behind us.

“However, the upcoming changes to the funding regime mean that many schemes – even those with an IAS19 surplus - are more vulnerable to being asked to make additional cash to meet new funding deficits, unless they take a proactive approach and provide alternative forms of security.

“Analysis we did earlier this year showed that only 10 per cent of schemes showed a surplus on the more prudent basis of the proposed fast-track approach.

“Whilst this position has improved to date, for many companies sponsoring larger pension schemes, the bespoke route will make sense and will ensure the appropriate level of protection is provided in a way that uses corporate resources efficiently.

“Our message is that scheme sponsors need to understand the proposals, work out how their scheme will be impacted, and not be misled by the rising IAS19 surplus figures. Doing this work now will save some potentially nasty shocks and surprises further down the line.”

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