Pension deficits at the UK's 350 largest listed companies fell by £27bn over the 18 months to June on an accounting basis, according to Barnett Waddingham.
As of 30 June, the combined defined benefit (DB) shortfall was £35bn, compared to £62bn as of January 2017. The upturn was thanks to a mixture of strong investment performance and increased deficit recovery contributions (DRCs), the consultancy said.
The reduced funding hole now, on average, represents just 17% of company's pre-tax profits compared to 70% at the start of 2017. This is the lowest level since 2011.
Despite the improvement, the "vast majority" of schemes currently showing an IAS 19 pension deficit are more than 10 years away from showing a balance sheet surplus, the consultancy added.
Partner Nick Griggs said: "The majority of companies ended 2017 with their DB scheme in a healthier state than the previous year. While this is positive news, it would not take much to tip the balance the other way. Our analysis suggests that a 0.5% fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE 350 DB schemes up to £85bn."
FTSE 350 sponsors made combined DRCs of £4bn over 2017, with these representing 10% of dividend payments on average. Just over 40 sponsors increased their dividend payments while reducing their DRCs, although this could be because they have met their agreed contribution schedule within a shorter period.
The Pensions Regulator (TPR) is increasingly taking a hard line on dividend to DRC ratios, saying earlier this year it believed some were excessive. Professional Pensions has revealed the watchdog is encouraging companies and trustees to agree to dividend-sharing mechanisms, where additional contributions are guaranteed to DB schemes when dividend payments breach a set threshold.
Griggs warned, however, that further market volatility caused by geopolitical events, such as Brexit and trade wars, could impact FTSE 350 companies' ability to pay contributions.
"Companies should ensure that they are comfortable with the level of investment risk being taken by their DB schemes and that the appropriate controls are in place to manage these risks."
Earlier this month, JLT Employee Benefits estimated FTSE 350 schemes were fully-funded on the IAS 19 basis as of the end of July, while Mercer said their deficit was £32bn on the same date. Meanwhile, on a gilts flat basis, PwC's Skyval estimated the deficit was £180bn.
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