On the go: Defined benefit schemes sponsored by FTSE 100 companies have seen their surplus on an IAS 19 basis hit a record £100bn in mid-May, according to new analysis.
LCP’s report, published on June 6, stated that in 2021 the combined IAS 19 funding position of FTSE 100 schemes improved from an estimated surplus of £10bn to a surplus of £59bn by the end of the year.
The new estimated record of £100bn in 2022 — the first time this barrier has been crossed — is largely driven by rising discount rates, the consultancy noted.
LCP explained that IAS 19 discount rates are based on high-quality corporate bond yields, and since the 2021 year-end there has been a sustained increase in corporate bond yields to more than 3 per cent a year, a landmark not seen since before the EU referendum in mid-2016.
This rise since the year-end, in isolation, will have reduced IAS 19 liabilities by a further 20 per cent — broadly a £100bn reduction in pension liabilities for the FTSE 100, it added.
The analysis also revealed that FTSE 100 companies are sitting on up to an additional £10bn of pension surplus due to the long-term impact of the pandemic on life expectancy, which could result in a fall in liabilities up to 2 per cent.
According to LCP, this surplus is “hidden” because many companies are not recognising this impact within their corporate accounts due to accounting rules.
“This year, we expect to see an increase in the number of companies making such an allowance, further improving the aggregate position,” it noted.
The research also showed that current high levels of inflation, as well as increases in expectations for future inflation levels, have increased pension liabilities for FTSE 100 schemes by £40bn.
However, “scheme assets will likely offset this increase to an extent and dampen the impact on corporate balance sheets”, LCP noted, adding that many schemes will have seen assets rise more than their liabilities due to the caps on pension increases.
LCP partner Jonathan Griffith said: “At first glance, the takeaway from this year’s report is that this is job done and FTSE 100 pension schemes are now an asset for UK plc.
“While it’s clearly good news that more schemes are now in surplus, with rising inflation, a potential recession and a new funding code on the horizon, scheme sponsors need to make sure that they understand how much of a surplus they really have, how to manage it, and think about how they best buffer their schemes against the headwinds to come.”
