According to research carried out by Barnett Waddingham – a UK independent provider of actuarial, administration and consultancy services – final salary pension deficits of the top 350 UK companies has been almost halved from £62bn to £35bn by the end of June. This is the third year in a row that deficit contributions have increased.
Now, the scheme shortfalls account for just 17 percent of total profits, which 18 months ago were showing a shortfall of 70 percent. The research showed that part of the reduction was due to companies contributing more to their schemes – but Barnett Waddingham also observed that it was related to better performance of investment portfolios.
Nick Griggs - Partner at Barnett Waddingham – advised:
“With the health of the UK and global economy threatened by a lack of progress with Brexit and the threat of a trade war from Trump’s America First assault, there could a major impact on the size of pension deficits and the ability of FTSE 350 companies to pay the contributions needed to clear these. Companies should ensure 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.”
Recently, the collapse of British Home Stores and Carrillion – who both had large funding gaps in their schemes – highlighted the problems with DB pensions. Lesley Titcomb, Chief Executive of the Pensions Regulator, wrote to the Work and Pensions Select Committee stating that the average length of recovery for those DB plans which were in deficit, was 7 years. However, 20 per cent of schemes have a recovery plan of 10 years or longer and 5 per cent of schemes have a recovery plan of 16 years or longer.
Steve Webb - Director of policy at Royal London – stated:
“While some firms are in a much stronger place and some schemes are now in surplus, there will be others with a toxic combination of a weak employer covenant and an underfunded scheme.”
He added:
“The overall trend is very much in the right direction but it is too soon to be popping the champagne corks.”
Barnett Waddingham’s 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 percent fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE350 DB schemes up to £85bn.”
Currently, the government is considering what steps it could take to make DB pension schemes more secure. A white paper has been published by the department of work and pensions outlining possible crackdowns on bosses who mismanage final salary schemes and the government is considering whether the Pensions Regulator should be given greater powers.
