The combined pension scheme deficits of the UK’s biggest organisations plummeted by almost two-thirds in the past year, according to the Lane Clark and Peacock's annual Accounting for Pensions report.

The report showed that the aggregate FTSE 100 pension deficit now stands at £19 billion, down from £51 billion the previous year.

Key factors for the lower deficit include the change in the inflation measure from retail price index (RPI) to consumer price index (CPI), continued high contributions from employers, and stable economic conditions.

The report states that the shift to CPI as the pension indexation measure has created a windfall for some organisations with liabilities reduced dramatically. For instance, BT has seen a £3.5 billion decrease in liabilities in their 2011 accounts due to the change.

It also stated that pension scheme funding continued apace in 2010, albeit with £11 billion of the £17 billion paid into FTSE 100 schemes going towards reducing deficits rather than providing additional benefits for employees. For instance, HSBC paid £2.1 billion into its scheme in 2010, the largest contribution made this year and three and a half times the amount they paid in 2009.

Other key findings of the report include:

  • More organisations are finding innovative ways, other than direct payment of cash contributions, to provide security to trustees, or to fund pension scheme deficits.
  • An emerging trend is for firms to enter into partnerships with their pension scheme trustees. In most cases, organisations have sold property to the partnership which is then leased back to the firm with the rental income generated by the partnership paid into the pension scheme. Organisations that have set up this practice include: Marks and Spencer, Sainsbury’s, Whitbread and Kingfisher.
  • Defined benefit (DB) pension scheme provision continues its decline. During 2010 a number of FTSE 100 organisations made changes to reduce the level of pension benefits being built up by employees. Many have limited the rate of increase in pensionable salary with AstraZeneca, Lloyds Banking Group and United Utilities among those introducing caps.
  • 15 more FTSE 100 organisations, including Aviva, Unilever and Vodafone, closed their final salary pension schemes to all future accrual in 2010, or announced that they plan to do so in the near future. In a few cases, a lower level of DB provision will be provided to existing members on a career average basis.

    • Bob Scott, senior partner at LCP, said: “The gain for organisations comes at a cost for many employees in the form of reduced pensions.†

    “The change to CPI is entirely dependent on the wording of each scheme’s rules and we are seeing a small-print lottery, under which a 45-year-old deferred pensioner in one scheme is unaffected yet a similar member in another scheme could stand to lose roughly a quarter of the value of their pension.

    “The last 12 months have been a relatively benign period for pension schemes but it would be a mistake to think that the pensions challenge has gone away.

    “FTSE 100 firms still have about £400 billion of UK pension liabilities and the challenge remains not only to ensure that members receive what they were promised but to find ways to provide today’s young employees with decent pensions as final salary schemes decline.”

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