FTSE 350 firms pay 37p out of every £1 they spend on pension provision on reducing existing defined benefit (DB) pension deficits, Barnett Waddingham has found.

According to the firm's research, despite the fact that FTSE 350 firms' pension deficit contributions are now at the lowest level they have been for five years, they still equate to almost 40% of the total paid towards pension provision for the UK's largest businesses.

Nick Griggs, Barnett Waddingham head of corporate consulting said: "The fact that 37p of every pound spent by companies on pensions is paid towards clearing pension deficits is striking and illustrates just how much companies are still having to pay in order to reduce funding shortfalls."

He added: "Nonetheless, the overall picture for DB funding in 2013 has improved somewhat with deficit contributions seemingly placing less of a strain on company finances particularly for some of the more extreme cases we saw several years ago.

"With The Pensions Regulator's (TPR) new funding code of practice promising to be less restrictive on corporates going forwards, directors should be optimistic about the future."

Barnett Waddingham's research also found that DB schemes are having a significant impact on shareholder returns with deficit contributions of 33p being paid for every £1 paid out to shareholders in dividends.

However, this is also at the lowest level it has been for five years, when compared to an average of 38p over the preceding four year period, Barnett Waddingham said.

Griggs said: "Our research already notes an improvement in the scale of deficit contributions being ploughed into DB schemes and there has been a welcome reduction in deficit contributions relative to dividends paid to shareholders.

"Shareholders, which will include defined contribution (DC) pension savers, will also welcome the increase in dividend payments relative to DB scheme deficit contributions which must have been a major drag on shareholder returns."

The findings also revealed that the total IAS19 deficit reported by FTSE 350 companies in 2013 was £55.6bn representing a £7.6bn reduction in the aggregate shortfall from the previous year, while the deficit contributions which were paid out in 2013 were £8.5bn, representing a decrease of over 20% compared with the preceding year.

Barnett Waddingham said that the effects of auto-enrolment on the bottom line became apparent, with an average increase of 16% in defined contribution (DC) cost for the largest firms in the FTSE 350.

Furthermore, there were 37 companies who could have afforded to buy-out their DB schemes using the increase in their cash holdings from 2012 to 2013.

Griggs said that the FTSE 350 still had 180 companies offering some of their current employees access to a DB pension at the time of reporting their 2013 financials.

He said: "With the end of contracting-out for DB schemes on the horizon and with the Pensions Ministers' crusade to introduce a legal framework that will allow companies to offer some form of 'risk sharing' pension arrangement, it will be interesting to see how pensions or perhaps more accurately in future 'retirement savings' will change over the next few years."

First published 14.08.2014

monique_simpson@wilmington.co.uk