The survey also found FTSE 100 companies paid around five times as much in dividends as they did in contributions to their DB schemes in 2016. This is where employees are promised a specific monthly payout when they retire, based on their age, tenure, salary, and linked to rates of inflation.
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By 9 August, LCP estimates FTSE 100 companies had pension deficits totaling £63bn, up by nearly 37% from £46bn at the end of July.
The findings come amid mounting fury over firms putting investors over pension fund members. But with interest rates and bond yields collapsing since the financial crisis, as the below chart from stockbroker AJ Bell shows, that’s getting increasingly hard.
Record low bond yields pushed the liabilities of United Kingdom pension schemes up to an all-time high £2.3 trillion on 1 July, increasing the yawning deficit to a record £935 billion, including a £115 billion hit from the European Union referendum result, according to Hymans Robertson, an independent pension’s consultancy, making it responsible for £115 billion of debt.
Claire Trott, director and head of Pensions Technical at Talbot and Muir, says the widening gap between defined benefit schemes and defined contribution schemes is something that isn’t going to go away anytime soon.
Andrew Pennie, head of pathways at Intelligent Pensions, says for FTSE 100 companies a balance needs to be struck between funding pension costs, making profits and satisfying and attracting shareholders.
Controversy around how much sponsors pay to meet DB benefits as well as dividend pay outs to shareholders, are issues that have gripped the industry this year. “It can only be fair to members if dividends are stopped and they can only start again once the full RPI lost is paid to pension scheme members”.
‘The increasing cost of DB pension provision has meant that more contributions went towards additional pension accrual than in any year since 2009, ‘ says Scott. “Not only is this a drag on company performance and the wider United Kingdom economy, but the relatively small contributions going into [defined contribution schemes] may be storing up problems for the beneficiaries of those schemes when they come to retire”.
High dividend paying company shares have become more sought after as low yields on bonds have forced investors to look elsewhere for income. That creates a drag on economic growth.
More than half of FTSE 100 companies struggling with big deficits in their pension plans paid out more in dividends to shareholders a year ago than the value of the shortfall, according to a new report.
Experts have said the industry must come up with innovative solutions to the sustainability of DB schemes.
DC is defined contribution, the alternative to DB.
However, what’s interesting about LCP’s report is it shows most of the biggest companies can afford to make these payments.
But if the government doesn’t act, companies might instead.
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The final salary scheme is on its last legs and the end is probably a good thing.
