The UK’s top companies have pumped £200 billion in pension contributions largely to avoid drops in funding levels since 2007, according to latest research.
LCP’s latest Accounting for Pensions report reveals that 2020’s year-end position was the best for FTSE100 pension balance sheets in 13 years.
A total of 60 per cent of top companies were in surplus at their accounting date yet still paid £5 billion in contributions into pension schemes. However, LCP warns that potential changes to future pensions funding rules could cause FTSE100 deficit contributions to double.
The average FTSE100 chief executive has seen pension contributions slashed by a third in just two years as regulatory pressure hits. The average chief executive’s pension contribution in 2020 stood at around 17 per cent of basic salary, down from 25 per cent in 2018.
Dividends still hugely outpace pension contributions, the research finds. FTSE100 companies paid just over £70 billion in dividends in 2020, compared to £10 billion in pension contributions.
While the dividends have fallen by a third since 2019, businesses are likely to face increasing pressure from the regulator and trustees to prioritise pensions, LCP argues.
The research also reveals that companies face a huge margin of uncertainty around the financial impact of Covid-19 mortality changes. This translates to a potential positive or negative £30 billion impact on liabilities for FTSE100 pension balance sheets and a £100 billion impact for the UK as a whole.
Possible outcomes range from improvements in life expectancy due to an increased spotlight on public health post-pandemic, to a flat line in mortality rates because of Covid-19. LCP calls on companies to tread carefully when making assumptions about life expectancy changes.
“There are many challenges on the horizon for pension schemes, particularly around the impact of new regulations on funding, continued market volatility, and the uncertainty around the impact of Covid-19 on life expectancies,” said LCP partner and report author Jonathan Griffith. “That said, following a year like no other and over a decade of volatility, the pension schemes of FTSE100 companies have started 2021 from a position of strength – with improved funding levels and reduced risk.”