More than £35bn paid into FTSE 350 pensions

FTSE 350 organisations have paid more than £35 billion into their pension schemes over the last three years with little effect on overall deficits, according to research by pension consultancy Barnett Waddingham.

The research, which highlights the impact defined benefit (DB) pension schemes are having on FTSE 350 organisations, found that 23 companies paid more towards clearing their DB pension deficit than they did to shareholders in the form of dividends.

The research also found:

  • The total deficit reported by FTSE 350 companies in 2012 was £64.9 billion, which is only £4.1 billion less than in 2009.
  • The average FTSE 350 company has paid 53p of deficit contributions for every £1 of dividend paid to shareholders in the past four years.
  • 26 companies had pension scheme liabilities that exceeded their market capitalisation. 
  • 74 companies were paying more to reduce DB scheme deficits than they were towards future pension provision for current staff.
  • On average, FTSE 350 companies paid nearly £4,000 per employee to clear DB scheme deficits, an increase of 15% compared to 2011. By comparison, the cost of providing future pension provision for current employees, including defined contribution (DC) arrangements, remained static at £2,600 per employee in 2012. 
  • 13 FTSE 350 companies paid deficit contributions that were greater than 30% of operating profit.
  • For 32 companies, it would take over a year to repay the DB scheme deficit if all cash generated from day-to-day operations was used solely for this purpose.
  • For 19 companies, despite an implied deficit recovery period of less than five years, deficit contributions exceeded free cash flow.

Nick Griggs, head of corporate consulting at Barnett Waddingham, said: “As organisations plan for the future, it is often the uncertainty around future contribution requirements to DB pension plans that is as much a problem as the absolute amount that is currently being paid.

“This is highlighted by the persistence of large deficits despite significant contribution payments and the resistance employers will face from scheme trustees should they want to reduce contributions if cashflow worsens. 

The Pensions Regulator’s new statutory objective should help to reduce the impact pension scheme deficits have on the sustainable growth of employers. Our research emphasises the considerable volumes of cash DB scheme deficits are consuming and the knock-on impact this must be having on investor returns and companies’ growth plans.

“With the introduction of auto-enrolment, the government has taken a small step towards closing the generational pensions saving divide that will materialise over the coming years.

“However, if employers are expected to provide the majority of the funding to close the gap, the cost of future pension contributions earned by employees will need to increase significantly. For organisations with a fixed pension budget, this increase is reliant on deficit contributions reducing.”