An annual report of FTSE 100 companies has found that the combined pensions deficit has increased from £12 billion to £17 billion over the last decade.
The 24th annual Accounting for Pensions report, by LCP, found that, despite the FTSE 100 companies having paid around £150 billion into their defined benefit (DB) schemes over the last 10 years, the surplus has increased.
LCP said the continued rise in liability values, driven by falls in bond yields, is responsible for the increase.
Bob Scott, LCP's senior partner and author of the report, said: "The fall in bond yields over the last 10 years has led to a sustained rise in liability values, more than 85% since 2007, meaning companies have effectively paid £150 billion to go backwards.
"Companies remain under increasing pressure to pay more into their schemes, and one can only hope that the contributions companies pay in future will have a bigger impact on the pensions deficit than in recent years."
Despite the overall increase, the data from the last year paints a more positive picture. UK pension liabilities have improved from £46 billion – the figure disclosed in last year's report.
LCP said the improvement in the net deficit since last year is due to strong returns on assets and a record level of contributions, with FTSE 100 companies paying a total of £17.3 billion to their defined benefit schemes in 2016.
This follows £13.3 billion of contributions paid in 2015, £12.5 billion paid in 2014 and £14.8 billion paid in 2013.
Following last year's Brexit vote, the combined FTSE100 pension deficit increased to almost £80 billion at the end of August 2016 – the highest level since 2009 – before steadily reducing over the remainder of 2016 and the first half of 2017.
By the end of June 2017, the combined deficit had reduced by £29 billion from the position at 31 July 2016.
Scott said: "The full impact of Brexit, direct and indirect, on companies who sponsor defined benefit pension schemes is yet to be seen - what we see at present is that more and more companies are paying substantial amounts to fund legacy defined benefit schemes whilst making modest contributions to their current employees' defined contribution schemes."
Graham Vidler, director of external affairs for the Pensions and Lifetime Savings Association (PLSA), said the report supports its own findings that the current DB system isn't fit for the future.
He said: "The need to pay for past promises could divert employer resources away from the investment necessary to ensure their firms' future, but, despite this, firms are running to stand still as deficit levels remain stubbornly high and members of schemes whose employers are most under pressure have just a 50:50 chance of seeing benefits paid in full."
"The current system is not fixing itself as it is too fragmented, manages risk inefficiently and has a rigid approach to benefits."
He added that PLSA believes consolidation has the potential to reduce risk to scheme members, as well as for sponsors and the wider economy, and a final Taskforce report is due soon, which will develop proposals for policy and regulatory measures needed.
First published 04.08.2017
Lindsay.sharman@wilmingtonplc.com
