FTSE 100 Pension Costs to Double Without ‘Drastic Action’, Retail Sector Pension Black Hole Widens by £6bn to Match Annual Profit

royal-dutch-shell-pension-deficitThe UK’s 100 largest listed companies face seeing their defined benefit pension costs double over the next three years unless “drastic action” is taken, according to JLT Employee Benefits.

In March this year, JLT put the combined FTSE 100 deficit at £87bn. It said only 29 companies disclosed a pension surplus in their most recent annual reports, while 59 companies disclosed pension deficits.

Royal Dutch Shell had the biggest pension liability, at £57bn, while 15 other companies had liabilities of more than £10bn.

JLT made the prediction after it found that 52 per cent of the total amount businesses were spending on their employees was going towards DB pension schemes.

Three years ago, the percentage of employee expenses going into DB schemes was just 26 per cent.


Meanwhile Britain’s biggest retailers are grappling with a £6bn jump in their pensions scheme deficits, which threatens to dwarf stock market valuations and the industry’s profits for the year.

The multi-billion pension liabilities at major retailers including Tesco, Sainsbury’s and Marks and Spencer are expected to have ballooned by almost 30 per cent since the start of the year following the slump in sterling after the EU referendum and the Bank of England’s move to slash interest rates.

For retailers, total pension liabilities represent approximately two thirds of the value of the businesses.

Tesco’s pension deficit has doubled in the past year to more than £5bn, threatening to delay the resurrection of dividend payments by Britain’s biggest retailer.

The ballooning black hole in the supermarket’s pension scheme is another setback for Tesco, which has been attempting to bolster its balance sheet since an accounting scandal engulfed it two years ago.

Tesco’s pension scheme is one of the largest in the country, with 350,000 members, including 203,000 active members of staff.

Tesco reported earlier this year that it had shrunk its pension deficit, to £2.6bn after tax, from £3.9bn last year.

The issue of pension deficits has been brought into sharp focus following the collapse of BHS and the huge restructuring of Tata Steel’s £15bn pension scheme.

The jump in the retail sector’s pension deficit is equivalent to roughly 10 per cent of the total value of the companies, and potentially the sector’s entire profits for this year.

Tesco followed a wider trend earlier this year by closing its final-salary pension scheme and introducing a defined contribution scheme, which is less risky and cheaper. However, the grocer’s last annual report revealed that it still faces a huge £3.2bn pensions deficit, which will have only widened following the impact of lower gilt yields.

Charles Cowling, managing director of JLT Employee Benefits said that he expects all existing defined benefit schemes, including final-salary plans, to be closed to new members by the end of the year as companies scramble to deal with the rising costs.

Whilst the UK’s vote for Brexit has pushed gilt yields to historic lows, it has also pushed defined benefit transfer values to record highs.

Following the EU referendum on 23 June, UK 10-year gilt yields tumbled to below 1 per cent for the first time ever, increasing the cost for DB schemes to meet their liabilities. This automatically increased the value of DB transfers, which are calculated according to the cost of meeting liabilities.

For example, on 30 June, a 64-year-old with a DB pension worth £10,000 a year could expect to receive a cash sum of £223,000 if they transferred now.

Post-Brexit, it had become more expensive for DB funds to meet their liabilities, because their favourite type of investment – UK gilts – were no longer doing the heavy lifting.

Unfortunately for DB schemes, this also meant the value of DB transfers had gone up, because they are calculated according to how much of today’s money it will cost the scheme to make good on promises to members.

The 30 June value of £223,000 was £20,000 more than the value on 1 January this year and £25,000 higher than in March 2015.

Given gilt yields have continued to fall, the value today would likely be higher still.

Whilst high transfer values are not good news for pension schemes themselves, it does present an opportunity for members looking to transfer their pension, as well as take advantage of the greater flexibility and inheritance tax advantages of pension freedoms, not to mention protecting against the recent high-profile pension scheme failures.

Is your retirement planning on track? To learn more and for a professional, no obligation review of your existing retirement provisions click here.


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