Barnett Waddingham research: Funding level for FTSE 100 pension schemes increases

The average funding level for FTSE 100 firms’ pension schemes has increased due to strong equity market returns seen in the second half of 2010, according to research conducted by Barnett Waddingham.

The average IAS19 funding level for the organisations surveyed increased to approximately 88% at 31 December 2010 compared with 83% at 31 December 2009.

Following the government’s announcement in 2010 for future statutory increases in occupational pension schemes to be linked to changes in the consumer prices index (CPI) rather than, as previously, the retail prices index (RPI), a small number of FTSE 100 firms disclosed both RPI and CPI assumptions.

The average CPI assumption was 2.9% per annum, lower than the 3.5% RPI assumption used. Using an inflation assumption based on CPI rather than RPI will also explain some of the increase in the average funding level

Other results from the survey show:

  • All organisations used discount rates within the range of 5.1% per annum and 5.8% per annum (a similar sized range to 2009), while 36 out of the 47 companies used a discount rate of either 5.4% or 5.5% in their pension liability calculations.
  • The average RPI inflation assumption adopted by organisations in the survey was 3.5%, compared to 3.6%in 2009.
  • The average IAS19 funding level was approximately 88% in 2010 (83% in 2009).
  • The average real salary growth assumption was 0.7% (0.8% in 2009).
  • The average expected return on equities was 7.8% per annum in 2010 (7.9% in 2009).
  • The average expected return on bonds was 4.9% per annum in 2010 (5.1% in 2009.)

Nick Griggs, head of corporate consulting, Barnett Waddingham, said: “The switch from RPI to CPI as the basis for calculating statutory pension increases has provided a welcome boost for the firms in our survey.

“With FTSE 100 firms paying such significant amounts into their defined benefit (DB) pension schemes it is good to see an improvement in the average IAS19 funding level after the falls seen in 2008 and 2009.”

For more articles on pension fund levels