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Major reversal of funding positions for UK’s FTSE 100 Pension Schemes

Major reversal of funding positions for UK’s FTSE 100 Pension Schemes


Lane Clark & Peacock LLP (LCP) has revealed in its 15th annual Accounting for Pensions report, that UK pension schemes of the FTSE 100 companies had a net deficit of £41bn, as at mid-July 2008 compared to a £12bn surplus in July 2007. This is the largest 12 month swing in FTSE 100 funding levels since the introduction of modern pensions accounting methods in June 2002. The credit crunch, equity market volatility and rises in expected inflation have caused severe swings in funding levels over the last year.   

Key findings of LCP’s 2008 report include the sharp plunge in funding levels is despite FTSE100 companies pumping nearly £40 billion into their pension schemes over the last three years, and some taking steps to reduce risk, with the average level of equity investment falling from 59% to 53% over 2007. The position could have been far worse. The IAS19 accounting standard has had an effect on balance sheets, as it requires companies to value liabilities using corporate bond yields, which have risen to unprecedented levels compared to gilts. LCP estimates that, since January 2008, rising bond yields have reduced IAS19 liabilities by £40bn. This highlights one of the shortcomings of IAS19.

Companies continue to use a wide range of mortality assumptions. Life expectancy for a male pensioner aged 60 in the UK ranges from 82 to 89 years. Disclosure by international companies is worse than the UK – only eight non-UK companies showed their assumption and indicated a life expectancy for a male pensioner age 60 of around 84 years.

A further £9bn has been added to FTSE 100 deficits between 2006 and 2007 as a result of longer life expectancy assumptions – on top of a similar “bump” to liabilities last year. A rapidly evolving buy-out market has led to the first FTSE 100 companies offloading pension liabilities, namely Lonmin and Friends Provident. LCP sees scope for significant further buy-out activity within the FTSE 100, even as prices start to edge up.        

The combination of new proposed powers for the Pensions Regulator and the return to deficit for many companies presents new uncertainties and   challenges, particularly for those companies in need of re-structuring or re-financing in order to adapt to an economic downturn.


New, harsher, rules for valuing and disclosing pension liabilities are being threatened by the European Commission, as they seek to extend present rules for insurers (“Solvency II”) to pensions. Without wholesale changes, Solvency II may require schemes to be funded to well above buy-out levels. These changes (ie new powers for the Regulator and Solvency II for pensions) will, if introduced, hasten the closure of schemes to future accrual.


The report highlights that at least three FTSE 100 companies could have secured their pension liabilities earlier this year in full without having to make additional contributions. By mid-July, deteriorating market conditions meant that the opportunity had passed thus highlighting a possible governance gap with regard to the speed of investment decision-making.


Reports and accounts from international companies which form the membership of the FTSE 100 Global index showed a reduction in net pension deficits to £18bn compared to £58bn in 2006 due to higher corporate bond yields. A fall in equity markets to mid-July 2008 may have reduced plan assets by £40bn, but rising bond yields have reduced liabilities by £30bn resulting in a £30bn deficit in mid-July 2008. Only 25 companies in the FTSE 100 Global index disclosed mortality assumptions. This makes it impossible to determine if these multinational companies have adopted the same rigorous approach to life expectancy as their UK counterparts.   

Bob Scott, partner at LCP, said; “UK pension schemes of FTSE 100 companies enjoyed a brief period of surplus until early in 2008. Some companies chose to spend their surpluses on various forms of de-risking activity including buy-out, purchasing financial swaps and reducing their exposure to equities. Events of the last year demonstrate the importance of assessing and managing pension risks and being prepared to take opportunities when they present themselves.”


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