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Increases in surplus, but prudence means golden opportunity missed – LCP

Pensions & benefits DB corporate consulting Corporate strategy

The aggregate FTSE100 DB pensions surplus increased from £59bn at the beginning of 2022 to around £67bn at the year-end, corresponding to an increase in average funding level from around 110% to 120%.

With around 90% of FTSE100 companies disclosing an accounting surplus in their UK DB pension plan and as UK pension schemes reach record-high funding levels, LCP’s new Accounting for Pensions report looks at the impact of prudence within UK pension schemes. Whilst the high level of prudence within UK pensions will have largely protected scheme sponsors against possible new significant cash calls, it can have unintended repercussions for corporate balance sheets.

The huge shift in market conditions over 2022 will also have meant schemes taking a prudent approach will have missed out on a golden opportunity to generate value for sponsors, for members, and for wider stakeholders. Schemes taking more risk will have benefited with significant improvements in funding levels on all measures.

Other key findings in the report are:

  • Pension schemes have accelerated the move out of equities, with the amount of FTSE100 assets invested in equities falling by £50bn in 2022. This corresponds to the proportion of scheme assets in equities dropping by a third over the year and being less than 10% of total DB pension assets for the first time.
  • Around 3 in 4 FTSE100 CEOs aren’t receiving pension contributions in line with their employees despite ongoing campaigning from the Investment Association for executive pensions to be more in step with the rest of the workforce.
  • Increases in corporate bond yields over 2022 has led to a £200bn reduction in UK DB pension liabilities for the FTSE100.
  • Three times the number of companies disclosed making an allowance for the impact of Covid in 2022 compared to 2021, highlighting that the long-term impact of the pandemic is now more established.

Gordon Watchorn, Partner and Head of Corporate Consulting at LCP, commented: “Prudent pension strategies largely worked as intended throughout the LDI crisis and limited risks of future cash calls on pension scheme sponsors. Whilst this has increased the security of DB pensions over recent years, we are now at a point whereby schemes are looking to explore and implement different options to make the most of opportunities.

Jonathan Griffith, LCP Partner and author of the report, added: “With improved funding positions and market innovation, pension schemes are no longer seen as a millstone weighing down corporate growth. DB pensions in the UK now stand at a crossroads – they could be consigned to the history books as the rapid increase in insurance de-risking takes hold, or could be seen as an opportunity for growth and improved outcomes delivering enhanced value for all stakeholders and wider UK plc.

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