FTSE 100 companies paid around five times as much in dividends as they did in contributions to defined benefit pension schemes last year, according to LCP.

The annual Accounting for Pensions report revealed that the combined pension deficit of the 56 companies in the FTSE 100 that disclosed a deficit at their 2015 year-end was £42.3bn. Those same companies paid dividends totalling £53bn, about 25 per cent higher than the combined deficit.

However, this gap may close in 2016 following the recent cut in base rate and the extension of the QE programme, which have forced DB scheme deficits to increase. LCP has estimated that FTSE 100 companies had pension deficits totalling £63bn in early August.

LCP has also said that FTSE 100 companies are putting more than twice as much money into DB pensions as they are into DC schemes - £13.3bn compared with £6bn. It has also discovered that this discrepancy in contributions has grown in recent years.

LCP senior partner Bob Scott and the report’s author said that the increasing cost of DB provision meant that more contributions had gone towards additional pension accrual last year than in any period since 2009.

“This is despite the significant number of DB scheme closures, and a material reduction in the number of employees accruing DB pensions,” he said.

“Not only is this a drag on company performance and the wider UK economy, but the relatively small contributions going into DC may be storing up problems for the beneficiaries of those schemes when they come to retire.”

He added that the collapse of BHS and potential sale of Tata Steel UK had put the significance of pension liabilities and the impact that a large DB scheme could have on a UK company back in the spotlight.

“Companies with large deficits may see pressure from The Pensions Regulator on their dividend policy in light of the Select Committee’s report into BHS,” he warned.

According to LCP, allowing FTSE 100 companies to alter the increases applying in their pension scheme to the Consumer Price Index (CPI) would reduce liabilities by around £30bn. It has also argued that if companies had only to provide the minimum level of pension increase set out in legislation, then FTSE 100 pension liabilities would be reduced by up to £100bn.

“The government should end the uncertainty – the legal lottery – by allowing companies to move from RPI to CPI, subject to safeguards,” said Scott.

“The safeguards are important as they should not automatically allow a profitable company with a large pension surplus to increase that surplus by reducing benefits. They could, however, provide relief to a company with a large deficit where the trustees agreed it was in the members’ interests for benefits to be reduced.”

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