Pension schemes were treated to record contributions from Britain’s biggest companies last year in an effort to plug huge shortfalls, reports Lane Clark & Peacock (LCP).

The 17th annual Accounting for Pensions report shows that FTSE 100 companies paid an unprecedented £17.5bn into defined benefit (DB) plans in 2009, a figure 50 per cent higher than the previous year.

The contribution injection did help drive the aggregate FTSE 100 pensions deficit down from £96bn in 2008 to £51bn, although improvements in asset values following strong investment returns also helped ease the DB burden.

Royal Dutch Shell led the way with £3.3bn in contributions, up more than £2.5bn on 2008’s injection. Lloyds Banking Group, Royal Bank of Scotland and Unilever paid more than £1bn into their DB schemes, while BAE Systems, British Airways, Invensys, Morrisons, Rolls-Royce, Serco and Wolseley all paid more into their schemes than they did to shareholders in dividends.

Alternatives to cash funding are being increasingly used by companies as a way of bridging the gap between the amounts demanded by trustees, and the sums that companies choose to pay.

“In the wake of the financial crisis, pension scheme trustees have sought more money from their sponsoring companies to fund soaring pension deficits, leading to a record level of contributions last year,” commented Bob Scott, partner at LCP. “While this is reassuring for scheme members, such increases in contributions reduce the scope for companies to pay dividends and to invest in their businesses.”

Scott said a number of companies have modified their schemes to reduce pension costs going forward, and believes this trend could accelerate from 2012 as auto-enrolment comes into play.

The report also found that higher market inflation assumptions have increased scheme liabilities by £12bn for companies reporting at 31 December 2009, and the Government’s decision to switch from RPI to CPI could have reduced the FTSE 100 deficit at end June 2010 by £30bn.

Meanwhile, longevity assumptions added another £9bn to balance sheet liabilities.
“Pension policy in the private sector is now driven almost exclusively by financial considerations, which is understandable given the sums involved. However, such considerations largely ignore the social consequences of having large numbers of people accruing inadequate retirement provision. Put simply, it is unlikely that the benefits emerging from the defined contribution schemes that have been set up to replace defined benefit schemes in recent years will deliver adequate benefits,” Scott added.

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