Banking sector leads the way in diminishing FTSE100 DB pension deficits

As defined benefit pensions report an overall deficit decrease of £22bn, Barnett Waddingham’s annual FTSE100 report delves deeper to understand the bigger picture.

For 2017, the four major high street banks reported no pension deficit for the first time since Barnett Waddingham’s report was launched in 2001 – with an average funding level of 111% and an aggregate surplus of almost £15bn. This is due to good investment returns over the year, supplemented by further contributions made by the banks to reduce deficits. Overall, the FTSE100 deficit stands at £5bn, a decrease of £22bn from the previous year. In contrast to the banking sector, the largest deficits came from Oil and Gas sector.

The average IAS19 funding level for FTSE100 companies in 2017, rose by 5% from the previous year from 91% to 96%. The range of funding levels remains broad with some companies still showing a funding level of below 70% and one in nine schemes below 80%.

Interestingly, the impact of the pensions freedom reforms are starting to show on pension balance sheets. There was a 40% increase in the total benefits paid out of schemes sponsored by FTSE100 companies, as members take transfer values from schemes to access the flexibilities.

Martin Hooper, associate at Barnett Waddingham, said: “At first glance the results look promising, as the FTSE100 report close to surplus for the first time in recent years. Whilst the health of corporate pension schemes seems to be improving, it is clear that some companies still have a lot of work to do to improve their schemes’ funding levels.

“Pressures will remain for many companies against a backdrop of greater regulatory scrutiny of funding plans and the potential for strengthening of regulatory powers. How companies balance the pressure to increasing funding levels against other company financial objectives will continue to be a challenge going forward.”

Further survey highlights:

  • average life expectancy has decreased for the second year, the average life expectancy assumption from age 65 was 24.1 years (2016: 24.2 years)
  • the aggregate IAS19 funding level for the companies in our survey was 99% in 2017 – a 4% increase in funding level equates to around £22bn decrease in deficit
  • the fall in average discount rate of 0.2% pa in the year led to 3.3% increase in the disclosed Defined Benefit Obligation
  • out of 49 companies 42 disclosed a discount rate assumption between 2.3% and 3.0% pa for calculating their Defined Benefit Obligations
  • schemes had around 24% of their assets allocated to growth assets (2016: 28%)
  • the Survey also shows a trend of changing asset allocations since 2009, with a gradual trend away from equity investment into bonds and alternative asset classes

The survey is based on the pension disclosures of companies in the FTSE100 as at 31 December 2017.