Tesco, Diageo and Cadbury are the only FTSE 100 companies still running a defined benefit pension scheme that is open to new members. The remainder have all introduced measures to reduce or freeze benefits completely for new members.

This finding comes as part of Lane Clark & Peacock’s (LCP) 16th annual Accounting For Pensions 2009 survey.

The survey also revealed that FTSE 100 companies have again upped their assumptions of how long pension scheme members will live, adding another £8 billion to balance sheet liabilities. This year saw the first longevity hedge deal by a UK pension scheme, as Babcock International transferred longevity risk for pensioners to the capital markets. LCP expects a number of deals of this type from FTSE 100 companies in the coming months.

Overall, the LCP survey showed largest ever deficit for FTSE 100 pension schemes. The financial crisis has plunged FTSE 100 companies’ UK pension schemes into a £96 billion deficit, more than double the £41 billion estimated a year ago.

Key findings of LCP’s Accounting For Pensions 2009 report include:

  • Fallout from the collapse of Lehman Brothers hit pension scheme assets particularly hard. LCP estimates that those FTSE 100 companies which reported in December 2008 revealed losses on pension assets of £42 billion from the beginning to the end of 2008.
  • Some FTSE 100 schemes benefited from earlier action taken to reduce their pension risks. Standard Life and Rolls-Royce Group, for example, both bucked the trend and disclosed gains on pension assets from the beginning to the end of 2008 of 14% and 8% respectively.
  • LCP estimates that had new International Accounting Standards Board proposals to include pension-related losses and gains on company Income Statements been in force for 2008, aggregate reported profits for the FTSE 100 companies reporting in December 2008 would have been slashed by 70% (from £46 billion to £13 billion), due almost entirely to falling equity markets.
  • Some companies may be paying insufficient attention to their pension risks. LCP found that while 46 FTSE 100 companies identify pensions as a key risk to their business, only 17 set out a policy in their report and accounts for dealing with pension risk. This is very different to the comprehensive approach taken by all FTSE 100 companies to their other financial risks (such as changing fuel prices or foreign currency exchange rates) where there is full disclosure on risk management.
  • In the wake of the financial crisis companies are cutting back further on their defined benefit schemes. Only three FTSE 100 companies (Cadbury, Diageo and Tesco) now disclose that they offer defined benefits to new employees. Others have announced measures to reduce or freeze benefits completely for existing members.
  • Companies have again upped their assumptions of how long pension scheme members will live, adding another £8 billion to balance sheet liabilities. This year saw the first longevity hedge deal by a UK pension scheme, as Babcock International transferred longevity risk for pensioners to the capital markets. LCP expects a number of deals of this type from FTSE 100 companies in the coming months.
  • The cracks identified by LCP’s 2008 report in the IAS19 accounting standard – which requires companies to value liabilities using corporate bond yields – have widened considerably. Not only have the IAS19 numbers continued to diverge from trustee funding numbers, but the wide range of corporate bond yields means that pension accounting numbers may no longer give a consistent comparison for two companies reporting at the same time.

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