FSTE 100 companies have spent £200bn in defined benefit (DB) pension contributions since 2007, but most of this had been used to counter adverse market movements, according to analysis by LCP.

The consultancy’s latest Accounting for Pensions report added that although these contributions and the positive investment returns had resulted in the total FTSE 100 pension assets more than doubling in size, these gains had been "completely wiped out" by falls in yields increasing liabilities.

LCP found that whilst the aggregate position has moved “only marginally”, remaining broadly unchanged at a surplus of around £10bn, the aggregate 2020 calendar year-end pensions balance sheet position was the best seen since 2007.

It was also the highest year-end surplus since the IAS19 accounting standard was adopted by FTSE 100 companies, with 60 per cent of companies reporting an IAS19 surplus.

However, LCP warned that potential changes to future pensions funding rules under The Pensions Regulator's proposed DB funding code could cause FTSE 100 deficit contributions to double.

The firm predicted that more companies sponsoring larger pension schemes will consider the bespoke route, to ensure the appropriate level of security is provided, highlighting contingent funding as having an important role in help achieve this.

More broadly, it found that more and more companies are seeing the benefits of contingent funding, with over a quarter of FTSE 100 companies with UK DB pension schemes disclosing some form of contingent funding mechanism.

In addition to this, the report found that the average FTSE 100 CEO had seen their pension contribution cut by a third in two years amid growing industry pressure, with the average CEO pension contribution standing at around 17 per cent in 2020, down from 25 per cent in 2018.

However, despite the narrowing of the gap, LCP emphasised that there remains a disparity between the percentage cost of pension benefits for CEO and the average percentage point cost paid for employees.

Dividends also continued to outpace pension contributions by a “large margin”, despite the dividend level falling a third since 2019, with just over £70bn paid in dividends in 2020, compared to £10bn in pension contributions.

Alongside this, LCP warned that companies face a “huge margin” of uncertainty around the financial impact of Covid-19 on mortality changes, with the possible outcomes on life expectancy translating to a potentially positive or negative £30bn impact on liabilities for FTSE 100 pension balance sheets, and £100bn for the UK as a whole.

Given this, it acknowledged that it is perhaps "no surprise" that there has yet to be a step change in the life expectancy assumptions used, with many appearing to adopt a "wait and see" approach for the time being.

The Pensions Regulator previously cautioned schemes to consider the consequences of Covid-19 mortality projections, emphasising that it is "early days" when it comes to understanding the long-term impact of the pandemic.

Issues around the requirement to equalise past transfers to correct for unequal guaranteed minimum pensions (GMP) were also raised in the report, with estimations that this could cost £300m in underpaid benefits, and a further £100m in legal, administration and actuarial adviser fees.

Commenting on the findings, LCP partner and author of the report, Jonathan Griffith, said: “There are many challenges on the horizon for pension schemes, particularly around the impact of new regulations on funding, continued market volatility, and the uncertainty around the impact of Covid-19 on life expectancies.

“That said, following a year like no other and over a decade of volatility, the pension schemes of FTSE 100 companies have started 2021 from a position of strength – with improved funding levels and reduced risk.”

LCP head of corporate consulting, Gordon Watchorn, added: “Now more than ever, it is a tricky balancing act for corporate sponsors to ensure members get their benefits paid in full whilst also making sure other stakeholders’ interests are protected.

“The pensions landscape is changing, and our analysis has highlighted that there remain significant opportunities for those companies who are able to be proactive and fully engage with their pensions strategy.”

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