FTSE100 DB pension schemes being in surplus is ‘new normal’ as latest figure stands at £42 bn - LCP

LCP’s latest annual Accounting for Pensions report, The New Normal has highlighted that for the 4th year in a row FTSE100 DB schemes are in a surplus, with the aggregate surplus sitting at £42bn as at December 31st 2023.  

80% of FTSE100 companies had an accounting surplus on their 2023 balance sheet.  While there has been a reduction of £25bn in the surplus from the beginning of 2023 up to the end of the year due to corporate bond movements, valuations for assessing the funding requirements of pension schemes have remained broadly stable. 

Other key findings in the report are:  

• At 31 December 2023, within the FTSE100 alone, over £250bn of UK pension scheme assets were tied up in bonds and cash, over 9x the amount invested in equities. This ratio has increased seven-fold in a decade.  

• The average pension contribution rate for a FTSE100 CEO is 10%, down from 25% in 2018. Around one in three FTSE100 CEOs are now receiving pension contributions in line with their employees – this is up from around one in seven in 2018. In addition, the number of FTSE100 CEOs receiving more than five times the average rate paid to employees has dropped by around 90% over the same period. 

• As in previous years, the assumptions connected to life expectancy and how it is projected to change in the future are the most challenging of the accounting assumptions to set objectively and the area where we see the greatest divergence from company to company. 

1 in 5 FTSE100 schemes have undertaken an insurance transaction of some kind in 2023 and with strong scheme funding levels, more schemes are looking at their endgame options.  

LCP are urging finance directors to incorporate accounting implications into strategic decisions early in the process and to better communicate what pensions accounting surpluses tell investors about the company. Different endgame options have different accounting implications which could impact the sponsor’s debt ratios or cause accounting volatility and have other business impacts.  

An accounting surplus has many benefits. The better funded a scheme is, the lower the risk of unexpected cash calls to the sponsor and scheme investments only need to provide AA corporate bond returns in future. This would mean no further contributions would be needed to pay all member benefits.  Finance Directors also need to message carefully if they expect to buy-in any time soon. The focus of the messaging then needs to be around management of risks. 

Luke Hothersall, Partner at LCP, commented: “From a financial perspective relatively benign conditions means pension surpluses that have emerged over recent years are beginning to look embedded. This relative stability presents an ideal platform for sponsors to review their pensions strategy, and in particular what “endgame” they are targeting for their pension scheme.” 

Phil Cuddeford, Partner at LCP, added: “For years, the direction of travel has been towards lower risk and ultimately getting the scheme off the corporate balance sheet by insuring it. There are now a wealth of endgame options and while accounting implications shouldn’t determine corporate pensions strategy, Finance Directors need to actively manage the messaging of accounting surpluses to the markets, rating agencies, and investors.