The 100 largest U.K. corporations contributed a record £17.5 billion ($27.9 billion) to their defined benefit pension funds in 2009, up 49.6% from the £11.7 billion contributed the previous year, according to a new report by investment consultant and actuary Lane Clark & Peacock LLP.
Lloyds Banking Group PLC, Royal Bank of Scotland PLC and Unilever PLC each contributed more than £1 billion to their U.K. pension funds. Royal Dutch Shell PLC topped them all with a £3.3 billion cash injection, up £2.5 billion from the previous year's contribution, according to LCP's 17th annual “Accounting for Pensions” report.
Funding valuations made at the nadir of the global financial crisis left U.K. corporate plans with gaping deficits, prompting companies to pony up cash (Pensions & Investments, Aug. 24, 2009).
In 2009, £10.9 billion — or 62% — of employer contributions to DB plans were made to close deficits, while the remaining £6.6 billion were regular pension contributions. In the five previous years, the ratio hovered between 34% and 39%.
However, it's unclear whether the large contributions will continue. Aggregate FTSE 100 company pension contributions will be £4.8 billion lower in 2010 than in 2009, according to LCP's analysis, which was based on 2009 company reports.
On the other hand, companies that are updating actuarial valuations of their pension funds this year might have to follow the lead of companies like Shell and Unilever in upping contributions.
“Indeed, we have seen evidence of this in some 2010 accounts that have already been published,” according to the report. Following valuations in the first quarter of 2009, three U.K. companies paid an aggregate £276 million to their DB pension funds in 2010, up from £182 million in 2009. That's a 51.6% increase.
In an Aug. 3 news conference in London, Bob Scott, LCP partner, said it is a “sobering thought” to consider that FTSE 100 companies have paid a combined £70 billion into their DB plans over the past five years and still had an aggregate funding deficit of £51 billion as of June 30, about the same as in June 2005. Total assets at the end of June were £338 billion, while liabilities were £389 billion. (Mr. Scott noted that preliminary data show the deficit fell to less than £40 billion as of July 31.)
The economy, pending legislation (such as a proposal to change the inflation measure used to calculate DB pension benefit increases that could lower liabilities for some plans) and possible accounting rule changes all point to uncertainty for DB plans in the future, Mr. Scott said.
In response, trustees have continued to take risk off the table: they are reducing equity investments; hedging inflation, interest rate and longevity risks; and offloading liabilities to insurance companies, according to the report. Also, there was “an unprecedented amount of changes to pension scheme benefits” in 2009, Mr. Scott said, including some companies closing plans to future accrual. “I don't think these (examples) will be the last ones,” he said. “This is an ongoing trend. We expect to see more and more (companies) doing that.”
Also, companies have continued to switch to defined contribution plans as replacements for DB ones, data from 2009 show. Employer contributions to DC plans in 2009 were £3.5 billion, nearly triple the £1.2 billion level in 2004. Meanwhile, regular employer contributions (as opposed to deficit contributions) to DB plans have declined in recent years to £6.6 billion in 2009 from a high of £8.1 billion in 2006. The 2009 level was below the £6.9 billion in regular contributions companies made in 2004.