Accounting changes could leave schemes £100bn worse off

Upcoming changes to accounting standards rules could leave FTSE 100 pension schemes up to £100bn worse off, twice as much as previously predicted.

Accounting for Pensions analysis by LCP found that the changes to the IFRIC 14 rules and increased pressure for accelerated contributions from firms could hit more than a quarter of FTSE 100 companies with £1bn bills.

LCP noted that, with The Pensions Regulator pushing employers to improve their schemes’ regulations, firms may find it difficult to pay dividends or raise capital, which could lead to increased regulatory capital requirements.

Its report also revealed that FTSE 100 firms paid around £90bn in dividends in 2018, seven times more than the £13bn paid into pension schemes. The increase from 2017 was attributed to higher dividend payments, rather than a fall in contributions.

Furthermore, FTSE 100 companies on average provided their CEOs with pension contributions worth 25 per cent of basic pay in 2018, despite pressure to align executive pensions more with those of the rest of the workforce.

It was also the first year in which less than 20 per cent of scheme assets were in equity holdings.

LCP partner, Phil Cuddeford commented: “Last year saw FTSE 100 companies in pensions accounting surplus throughout the whole year – for the first time in two decades. This is clearly good news. Large contributions and de-risking activity mean that member benefits are safer and more likely to be paid.”

Although the average estimated cost of GMP equalisation of 0.4 per cent in liabilities or £1.3bn in total is considerably lower than estimated before the Lloyds judgment, six FTSE 100 companies still took a hit to profits of £100m or more.

Cuddefod continued: “The FTSE 100 and the wider pensions industry will also have been relieved that the financial impact of GMP equalisation was significantly less than previously predicted.

“Despite this, it seems as if FTSE 100 balance sheets aren’t out of the woods just yet. With the regulator focusing on risk management and longer-term thinking, companies should be proactive in implementing long-term strategies if they are to meet the incoming regulatory requirements in the updated DB funding code, due to be consulted on later this year.”

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