The combined IAS19 deficit of FTSE 100 companies’ schemes was £41bn at 31 May 2012, compared to £19bn in 2011, according to LCP’s annual Accounting for Pensions Report.

Its nineteenth edition found that total IAS19 liabilities stand at £447bn and assets at £406bn, with the deficit increasing despite companies continuing to make high contributions. FTSE 100 companies paid a total of £21.4bn into their schemes in 2011, with almost £11bn going towards removing deficits in their DB schemes rather than boosting benefit accrual for current employees.

With auto-enrolment coming in later this year, pension contributions for the FTSE 100 are projected to exceed £26bn by 2013, unless they cut back on current contributions and benefits.

LCP partner and report author Bob Scott said: “The increased deficit this year reflects the fact that corporate bond yields sit at record lows and equity markets have been drifting for a number of years now. The challenge this poses to the UK’s leading companies is compounded by the significant volatility in deficits on a day-to-day basis. Deficits have fluctuated by as much as £10 billion in a single day as uncertainty continues to characterise both equity and debt markets. Against this background, we have seen companies pay very substantial pension contributions: four companies paid over £1bn into their defined benefit pension schemes in 2011 and, earlier this year, BT made a further £2bn payment to accelerate the removal of its deficit – the largest ever one-off deficit contribution to a UK scheme. ”

All FTSE 100 companies have ceased offering a final salary scheme to new employees and most of them now only offer new employees a DC scheme, LCP said. However, a small minority, including Tesco and Morrisons, continue to offer an element of DB pension provision. LCP said it remains to be seen whether the pensions minister’s ‘defined ambition’ schemes will lead to more companies following this route.

Only 35 per cent of FTSE 100 scheme assets was being held in equities at the end of 2011, compared to 43 per cent in 2011 and nearly 70 per cent ten years ago. This can be explained by the fact that the majority of liabilities now relate to former employees, and by a general move towards lower risk investment strategies.

Scott continued: “The overall picture is a challenging one. On the horizon is the prospect of European legislation which could mean additional funding requirements of up to £200bn should Solvency II style reserving be extended to pension schemes. Committing ever more company resources to make existing benefits more secure will mean that companies are less able to provide benefits for current and future employees. Auto-enrolment will extend basic pension provision to many more people but the extra costs may well lead companies to level down their existing commitments. As a result we can expect more cutbacks in the benefits for future service with a corresponding impact on FTSE 100 employees.”

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