FTSE100 DB pension schemes were in their strongest financial position for 20 years prior to the Covid-19 crisis hitting, according to new data from LCP.
The pension consultants latest Accounting for Pensions (AfP) report when these companies filed their 2019 account 60 per cent reporting an accounting surplus in their pension scheme, as measured on an IAS19 basis.
LCP estimates that by the end of March 2020 and the start of the Covid-19 crisis, 70 per cent were in surplus and combined were in their best position for 20 years.
However by the end of April – just one month later – FTSE100 schemes with an accounting surplus has slipped back below 60 per cent.
LCP says in some cases, accounting deficits fluctuated wildly after the start of the crisis. In just eight days from 10 March to 18 March this year, pension scheme liabilities on an accounting basis dropped by £150 billion due to a dramatic increase in discount rates.
On the asset side, most asset classes saw large drops in the first quarter of this year with the principal exception of government bonds as investor demand for ‘safe’ assets increased.
It’s important to note this report focuses on a scheme’s balance sheet position disclosed in company accounts, rather than the funding position which determines the cash contributions payable to the scheme.
LCP says that whilst the crisis has created serious turbulence for many of the companies in the FTSE 100, the impact on their pension deficits would have been more muted.
This is because their combined pension asset holdings are 60 per cent in bonds and only 20 per cent in equities, one of the asset classes that has been hardest hit by the virus. The impact on pension funds will also have been much reduced where liabilities were extensively hedged.
It adds that the impact of the crisis on long-term changes in mortality rates, and the potential knock-on effect on pension scheme finances is unclear at this stage.
The crisis has led to the postponement of wide ranging regulatory and legislative pension reform involving new powers for the pensions regulator and schemes setting long term funding and investment targets, which would have marked the biggest overhaul in pensions governance in 25 years.
The report also noted that the FTSE100 pension schemes that reported pension fund deficits in their annual accounts paid £30bn in dividends to shareholders and £5bn of contributions into their DB schemes in 2019.
A total of 60 per cent of schemes were in surplus and paid around £8bn of contributions into their schemes.
Between 2018 and 2019, the average pension contribution for FTSE100 CEOs fell from 25 per cent to 20 per cent of basic salary following new ‘name and shame’ rules from the Investment Association. The ratio of CEO to average staff contributions fell from four times to three times.
LCP says companies are also starting to adopt revised inflation assumptions in light of proposed RPI reform.
The report highlights that there have been small changes in both disclosed RPI and CPI inflation assumptions although there remains uncertainty around the exact impact of RPI reform.
LCP partner and co-author of the report Jonathan Griffith says: “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.”
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