LCP survey: private sector pension policy driven by finance

Since the beginning of 2009, nearly a quarter of FTSE 100 companies with significant UK defined benefit pension schemes have made changes to limit or prevent the build-up of further open-ended liabilities.

According to Lane Clark and Peacock’s 17th annual Accounting for Pensions research very few FTSE 100 companies still offer defined benefit schemes to new UK employees.

Bob Scott, partner at LCP, said: “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.”

The report states that Wolseley disclosed its principal UK scheme closed to new recruits over the year to 31 July 2009 and BP announced the closure of its final salary scheme to the majority of new joiners with effect from 1 April 2010.

Seven companies: 3i, Aviva, Barclays, Liberty International, Smiths, Vodafone and Whitbread all announced they have closed or have plans to close some or all of their defined benefit schemes to existing members. There are regular press reports of other companies taking similar steps.

A number of companies have targeted limits on pensionable salaries as a way of reducing their future pension costs. AstraZeneca, BT, Johnson Matthey, Legal & General, Marks and Spencer, Morrisons, Royal Bank of Scotland, United Utilities and Wolseley all announced plans to cap retirement benefits via pensionable salaries – by limiting future increases, averaging them over a period or freezing them completely.

In addition, BT, HSBC and RSA all opted to increase the retirement age, with HSBC also introducing employee contributions for the first time and RSA reducing the rate at which pensions accrue in future.

British Airways also recently announced plans to reduce future benefits, while giving employees the option to contribute more to retain existing benefits.

The report also reveals that FTSE 100 companies paid an unprecedented £17.5 billion into their defined benefit schemes in 2009, 50% more than the previous year.

Scott added: “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. 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.

“We have already seen a number of companies modifying their schemes to reduce ongoing pension costs – in some cases closing their schemes altogether – and this trend may be accelerated from 2012 as it becomes compulsory for companies to enrol all employees in a pension scheme and to offer a minimum level of contribution or benefit accrual.”

Other key findings of LCP’s Accounting for Pensions 2010 report include:
• Higher market inflation assumptions have increased pension scheme liabilities by £12 billion for those companies reporting as at 31 December 2009
• The UK government’s recent announcement that pensions indexation would switch from RPI (retail prices index) to CPI (consumer prices index) in future could have reduced the FTSE 100 deficit at the end of June 2010 by as much as £30 billion.
• Companies have again upped their assumptions of how long pension scheme members will live, adding another £9 billion to balance sheet liabilities as at the end of June.
• The move away from defined benefit schemes has continued as companies seek to limit costs and to close off their exposure to pension risks. Nearly a quarter of FTSE 100 companies have announced changes to their defined benefit pension schemes, in many cases reducing or freezing benefits, since the beginning of 2009.
• Many companies may be paying insufficient attention to their pension risks. LCP found that 32 companies neither made reference to pension risk nor reported taking any steps to reduce it in their 2009 accounts.
• Some companies, however, have sought to reduce their pension risks by switching their pension scheme assets out of equities and into bonds, or by transferring all or part of their liabilities to an insurance company via a buy-in, buy-out or longevity swap.

Read more on de-risking occupational pensions