FTSE 100 pen­sion schemes move into sur­plus

But are mem­bers of de­fined ben­e­fit schemes safer?

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Bring out the bunting! Just days af­ter Prince Harry and Amer­i­can ac­tress Meghan Markle, now the Duchess of Sus­sex, were mar­ried in Wind­sor, mem­bers of de­fined ben­e­fit (DB) schemes might also have been tempted to pop open the cham­pagne in cel­e­bra­tion.

Well maybe cham­pagne is go­ing a bit far, but cer­tainly a drop of Buck’s Fizz. Be­cause ac­cord­ing to Lane Clarke & Pea­cock (LCP), a London-based pen­sions con­sul­tancy, FTSE 100 DB schemes ended 2017 in sur­plus – mean­ing they had more than enough as­sets on their ag­gre­gate bal­ance sheets to pay off their es­ti­mated li­a­bil­i­ties (that is the amount they ex­pect to pay out in pen­sions).

Specif­i­cally, the firm reck­ons the UK’s big­gest com­pa­nies swung from a deficit of £31bn at the end of 2016 to a £4bn sur­plus at the end of last year.

It is the first time since 2007 – be­fore the fi­nan­cial crash hit – that FTSE 100-spon­sored schemes have recorded a year-end net sur­plus.

So why has this hap­pened? And what does it mean for those who rely on DB schemes to pay out their pen­sions?

LCP cites three pri­mary rea­sons for the im­prov­ing of DB fund­ing po­si­tions dur­ing 2017:

• Com­pa­nies con­trib­uted a stag­ger­ing £13bn to­wards the schemes over the course of the year – al­most dou­ble the cost of the ex­tra pen­sion ben­e­fits mem­bers earned

• Many schemes were boosted by the stock mar­ket bull run, in­creas­ing the value of the as­sets on their bal­ance sheet

• Some firms tweaked their life ex­pectancy as­sump­tions to re­flect re­cent data sug­gest­ing im­prove­ments in life ex­pectancy in the UK are slow­ing.

While this last point may seem at face value rel­a­tively in­signif­i­cant, even tiny changes in the fig­ures used to cal­cu­late life ex­pectancy can wipe bil­lions off the ac­count­ing value of a com­pany’s DB li­a­bil­i­ties.


Just as scheme mem­bers shouldn’t be overly con­cerned by head­lines say­ing DB deficits are bal­loon­ing, it’s also wise to take any claims that schemes are now swim­ming in pen­sion cash with a pinch of salt.

As you can see from the graph, the fund­ing po­si­tion of schemes is ex­tremely volatile and even the slight­est shift in in­ter­est rates – or any other as­sump­tion for that mat­ter - could add or re­move tens of bil­lions from the re­ported fig­ure.

Rather than as­sess­ing ag­gre­gate fig­ures, you should fo­cus on the deficit (or sur­plus) of the scheme you are in and as­sess the strength of the em­ployer re­spon­si­ble for pay­ing pen­sions.

Even if you are wor­ried about this, in most cases you would be well ad­vised to stay where you are be­cause, even if the worst does hap­pen and the scheme spon­sor fails, the Pen­sion Pro­tec­tion Fund (PPF) ex­ists as a valu­able lifeboat for mem­bers.

You can read more about the pro­tec­tion pro­vided by the PPF and DB trans­fers in gen­eral here.

Tom Selby, se­nior an­a­lyst, AJ Bell

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