Research by investment consultancy LCP revealed the aggregate pension scheme deficit for FTSE 100 companies increased by £29bn over the last decade, from a surplus of £12bn in 2007 to a deficit of £17bn this year.
This comes despite firms having pumped £150bn of cash into their defined benefit (DB) pension schemes over the period in an attempt to address the shortfalls.
LCP noted that the drop had been exacerbated by falls in bond yields which are used to calculate pension scheme liabilities.
The report found the average FTSE 100 company’s pension liability was 38% of its market capitalisation, an increase from 34% last year.
And it highlighted several firms where the pension risk poses a “significant risk” to their health.
BAE Systems’ liabilities were more than 170% of its market capitalisation at its 2016 year-end, and the deficit in its pension scheme was 33% of the value of the company.
International Airlines Group has pension liabilities of 268% of its market cap in 2016 (163% in 2015), although the deficit was only 7% of the company’s value.
Meanwhile, GKN had pension liabilities of 80% of its market capitalisation in 2016, with the deficit representing 34% of the company’s value.
But Laith Khalaf, senior analyst at Hargreaves Lansdown, said the high aggregate deficit value is more a manifestation of the state of the bond market than the health of DB pension schemes.
He added that from a shareholder perspective, ballooning deficits are “all hot air” and it is the triennial valuation at which point a notional accounting measure gets converted into the cash an employer needs to stump up.
“It is the annual scheme contributions which are decided at these reviews which affect the profitability of companies,” he added.
Khalaf observed, for example, Barclays, which recorded liabilities of £33bn in 2016, recently calculated its contribution plan on the basis of the deficit more than doubling over three years. The bank has agreed to pay in £4.5bn more as a result, but over a longer time period.
He added: “In fact, in the first few years, Barclays will have to pay less than under the previously planned contribution schedule, and by the time the next triennial valuation comes around, rising bond yields might largely have done away with the problem, in which case contributions would be scaled back.”
LCP’s report has also reignited the debate about shareholders getting a “bigger slice of the cake” than the pension scheme does.
Bob Scott, a partner at LCP, said despite the persistent deficits, FTSE 100 companies paid four times as much in dividends in 2016 as they did in pension contributions.
For example, excluding a one-off contribution of £4.2bn into the pension scheme, RBS’s dividends were five times larger than the contributions into the pension scheme, LCP said.
Scott added: “Looking just at companies with 31 December year-ends, 39 declared pensions deficits totalling £37bn. Those same companies paid out £39bn in dividends during 2016.”
