Incoming changes to IFRIC 14 rules and increased pressure on companies to accelerate contributions could worsen FTSE 100 balance sheets by up to £100bn, according to the latest edition of LCP’s AfP report.
The financial and business consultants said this could lead to more than a quarter being hit to the tune of £1bn. It added that with the Pensions Regulator pushing employers to “mend the roof while the sun’s shining”, the ability to pay dividends or raise capital may be at risk for some and could see increased regulatory capital requirements in the financial sector.
The report – now in its 26th year – also acknowledges the current spotlight on the audit market.
The firm said a complete overhaul of the audit sector is likely, following the creation of the new independent regulator, the Audit, Reporting and Governance Authority (ARGA). In addition, the Competition and Markets Authority (CMA) is proposing a “tough new measure”. Together, these could bring more focus on how pension figures are audited and on an auditor’s role in cases where companies have become insolvent.
Other key findings of this year’s report include:
- FTSE 100 companies have continued to pay more in shareholder dividends than pension contributions, paying around £90bn in dividends, seven times more than the £13bn paid to pension schemes. This increase from 2017 (when dividends were six times contributions) is due to higher dividend payments, rather than a drop in contributions
- FTSE 100 companies on average provided their CEOs with pension contributions worth 25% of basic pay in 2018, despite pressure to bring executive pensions into greater alignment with those of the wider workforce
- In line with wider de-risking trends and as the appetite for pension risk continues to fall, FTSE 100 companies have moved away from equities in favour of other asset classes. For the first time, less than 20% of their pension assets are now in equity holdings
Phil Cuddeford, LCP partner and lead author of the report, said: “Last year saw FTSE 100 companies in pensions accounting surplus throughout the whole year – for the first time in two decades. This is clearly good news. Large contributions and de-risking activity mean that member benefits are safer and more likely to be paid.
“The FTSE 100 and the wider pensions industry will also have been relieved that the financial impact of GMP equalisation was significantly less than previously predicted. Despite this, it seems as if FTSE 100 balance sheets aren’t out of the woods just yet. With the regulator focusing on risk management and longer-term thinking, companies should be proactive in implementing long-term strategies if they are to meet the incoming regulatory requirements in the updated DB funding code, due to be consulted on later this year.”