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Pension Funds

FTSE 100 pension funds show surplus for first time since financial crisis – LCP report

However, new international reporting standard could change that

The pension funds of FTSE 100 firms show a year-end accounting surplus for the first time since the global financial crisis, according to an analysis by Lane Clark & Peacock.

The consultant said in its "Accounting for Pensions" report, which is available for download on its website, that the analysis shows an overall accounting funding level of 101% for these pension funds at the end of 2017, up from 95% in 2016.

As at Dec. 31, these funds reported a surplus of £4 billion ($5.4 billion), compared with a £31 billion deficit a year earlier. LCP said this surplus has continued to grow to more than £20 billion at the end of April.

The 25th edition of the report showed funding levels have been driven by contributions by sponsoring employers, which reached £13 billion in 2017. That followed a record £17.3 billion in cash contributions in 2016. Changes in pension funds' approaches to longevity and discount rate assumptions also largely offset worsening financial conditions, the report said.

The report said discount rate assumptions have improved FTSE 100 pension funding by about £15 billion. The majority of FTSE 100 funds reporting as of Dec. 31 used a discount rate of between 2.4% and 2.6%. LCP's 2016 report said the average discount rate used by FTSE 100 firms was 2.7% per year.

Regarding longevity assumptions, LCP said 75% of companies that disclosed the life expectancy improvement tables they used as of Dec. 31 were using the Continuous Mortality Investigation's 2016 tables. "This suggests most companies are now updating this assumption every year when the new tables are published," the report said. CMI is wholly owned by the Institute and Faculty of Actuaries.

Asset allocations have also changed, with pension funds' exposure to equities falling to below 25%. That compares to a 26% equity allocation as of Dec. 31, 2016, and more than 60% 15 years ago, the report said.

However, the report warned of the potential impact of changes to accounting standards under new provisions by the International Financial Reporting Standards' IFRIC 14. The change will require that a company's liability broadly reflect the funding deficit of a pension fund, "which can be much, much larger" than the accounting deficit.

The report said "we may receive new draft rules" in 2018, which could mean the provisions become "a real issue for the majority, rather than the minority, of corporate DB pension sponsors."

Were all FTSE 100 firms to be covered by the revision, LCP estimated that the balance sheet position of FTSE 100 firms on a pension fund accounting standard could worsen by about £50 billion, with "several individual companies being hit to the tune of more than £1 billion."