FTSE 100 pension schemes grow IAS19 surplus over 2021 but ‘calm heads’ needed to navigate inflation and mortality assumptions

Latest analysis of FTSE100 pension positions by LCP’s Pensions Explorer shows that the combined IAS19 surplus now stands at around £60bn as at 31 December 2021, an increase of £50bn compared to the start of 2021.

LCP are warning that inflationary shocks and changes in life expectancy assumptions are the key issues that will need careful thought by scheme sponsors at the start of this year.

While the next set of core mortality projections due to be released in March this year do not place any weight on pandemic mortality data, LCP are advising companies to consider adjusting assumptions now to reflect the current position, depending on the specific circumstances of the scheme.

Analysis by LCP’s Health Analytics team, who work closely with government and the NHS, have analysed the drivers for change in mortality rates and believe there is rationale that supports a reduction of up to 2% of IAS19 liabilities in some circumstances. This is partially due to the direct impact of Covid-19, but also the indirect impact arising from fewer diagnoses and elevated levels of deaths due to factors such as coronary heart diseases, stroke and cancer. This broadly translates to a fall in liabilities of £10bn for the FTSE100 and £35bn across all UK pension schemes.

With annual inflation figures reaching highs towards the end of 2021 where RPI hit 7.1% and CPI 5.1%, increases granted to members of pension schemes could have been significantly higher than allowed for within corporate accounting figures. LCP believes that inflation has already weakened UK corporate balance sheets by around £20bn due to the impact on pension scheme valuations and that this could be much worse if it turns out to be more than a temporary blip. In response to this, LCP are urging Companies to consider their pension scheme’s investment and hedging strategies to ensure they remain appropriate and that they are aware of the level of risk.

Key points of analysis this quarter include:

• The latest figures show that 8 FTSE100 companies currently have an IAS19 deficit
• Changes to life expectancy assumptions could reduce liabilities across UK pension schemes by £35bn
• Recent rises in inflation could have already weakened corporate UK balance sheets by £20bn

Jonathan Griffith, Partner at LCP, commented: “There is an element of deja-vu as scheme sponsors deal with another year end against the economic backdrop of Covid uncertainty. Whilst the position of FTSE100 pensions schemes is thankfully much improved relative to 12 months ago, there will still be a lot for scheme sponsors to consider. Calm heads are needed to navigate some of the big issues this year and their material impact on schemes and actual cash payments in future. This includes the recent high inflation figures and how best to adjust mortality assumptions to allow for the impact of the pandemic.”