Almost three-quarters of FTSE 100 defined benefit (DB) pension schemes were in surplus on an accounting basis as the coronavirus crisis hit, according to Lane Clark & Peacock (LCP).
The consultancy's annual Accounting for Pensions report estimated that 70% of DB schemes were in a surplus at the end of March, leading to the best combined funding position in 20 years. This is based on 60% reporting a surplus on the IAS 19 basis in their 2019 accounts.
Market volatility has caused significant swings in funding levels, LCP said, with discount rates rising by an average of 1.5% per annum between 10 March and 18 March due to spiking credit spreads, resulting in a £150bn fall in liability value. The average discount rate ranged from 2.0% to 2.1% as at 31 December 2019, compared to 2.8% in 2018. Asset values also saw big drops in the first quarter, with the exception of government bonds.
At the end of April, less than 60% of FTSE 100 schemes recorded an accounting surplus, reflecting the volatile markets and significant changes in asset values. LCP said a record low month-end discount rate was recorded on 30 April.
Partner and report co-author Jonathan Griffith said: "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."
Another key finding in the report was that just under half of FTSE 100 firms were adopting a Retail Prices Index (RPI) assumption of 3%, with around a third using a figure of 2.9%. Taking account of proposed changes to RPI, LCP also found that 40% of companies were assuming a 0.8% gap between the inflation measure and the Consumer Prices Index, compared to just 10% before.
On life expectancy, most firms were using the latest available projection tables, using the default parameters within these projections, and then adopting a long-term annual assumed rate of improvement of 1.25%. However, LCP said the common practice of using the most recent data may diverge from next year as a result of the Covid-19 pandemic, its current uncertainty, and any differing experience that may be seen in DB scheme demographics.
The report also found that FTSE 100 companies with schemes in deficit paid out dividends that were six times as high as deficit recovery contributions, at £30bn compared to £5bn. The combined deficit, at £20bn, was also lower than the dividend payments.
However, average pension contributions for chief executives (CEO) were beginning to retreat, falling by five percentage points to 20% of basic pay, while the ratio of CEO to average staff contributions also dropped from four times to three times.
LCP partner and co-author Helen Draper commented: "FTSE 100 companies have also been responding to pressure around the pension packages of top executives. The overall generosity of CEO pension packages has been reduced and the gap between CEO pensions and those of typical workers has also come down. But there is still a long way to go before the pension provision for those at the top and bottom of most FTSE 100 companies comes into alignment."
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