FTSE 100 DB scheme closures continue apace

Retirement fundOngoing pension provision from defined benefit (DB) schemes offered by FTSE 100 companies reduced by 13% in the 12 months to the end of June, reflecting how DB provision is reducing.

The reduction amounted to £7.2 billion (€10 billion), according to JLT Employee Benefits research.

Just under a quarter of FTSE 100 companies provide DB benefits to a significant number of their employees. ‘Significant’ means the companies incur ongoing DB service costs of over 5% of total payroll.

The total deficit of FTSE 100 pension schemes has “plunged” to £78 billion, a deterioration of £19 billion over the year to the end of June. Meanwhile, their total disclosed pension liabilities have risen from £577 billion to £614 billion.

The figures indicate FTSE 100 companies continue to fund pension deficits.

A number of companies report significant individual changes to investment strategies. Eleven have changed their bond allocations by over 10%. The average pension scheme asset allocation to bonds has increased from 55% to 59%.

Pension schemes can represent a material risk to some FTSE 100 companies. Five have total disclosed pension liabilities greater than their equity market value – and for International Airlines Group, BAE Systems and RSA, total disclosed pension liabilities are almost double their equity market value.

Only 25 companies disclosed a pension surplus in their most recent annual report and accounts; 63 disclosed pension deficits.

Charles Cowling, director of JLT Employee Benefits, says: “We are seeing increasing evidence of the closing down of the UK’s private sector DB pension schemes.

“Tesco, United Utilities and the Royal Mail are just a few more major employers recently looking to close the doors of their DB schemes to all employees for future benefit accrual.”

He adds that changes in investment strategies also support this trend, with increasing evidence of “end-game planning” as liability-driven investment, pension buyouts and de-risking of pension schemes become more prevalent.

“All this comes against a backdrop of significant reforms in UK pensions. Tax changes and the end of contracting-out, as well as soaring costs, are encouraging employers to look elsewhere when designing remuneration strategies for employees. Sadly, this does not bode well for long term retirement savings in the UK.”

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