The defined benefit (DB) pension schemes of the UK’s 100 largest companies have reported a £22bn (€25bn) drop in the overall deficit over the past 12 months, boosted by an improvement in gilt yields and strong investment performance.

According to an annual FTSE 100 survey from consultancy group Barnett Waddingham, the UK’s four leading high street banks posted no pension deficits for the first time since the firm began its report in 2001.

The aggregate pensions deficit for the FTSE 100 companies stood at just £5bn, the firm reported.

“The banking sector has tended to implement a more conservative investment strategy faster than others,” said Martin Hooper, an associate at Barnett Waddingham. “This is possibly due to pressure from shareholders and regulators – and that’s had a beneficial effect.”

A stalling rate of life expectancy improvement has also helped pension funds to revalue their liabilities, Hooper added. In 2017, the average life expectancy post-65 stood at 24.1 years – down 0.1 percentage points from the year before.

However, Hooper warned of complacency.

“At first glance the results look promising, as the FTSE 100 [schemes] report close to surplus for the first time in recent years,” he said. “While the health of corporate pension schemes seems to be improving, it is clear that some companies still have a lot of work to do to improve their schemes’ funding levels.”

Indeed, while FTSE 100 companies have edged closer to eliminating their pension deficits, among the UK’s 5,800 private sector DB schemes the overall shortfall was £43bn at the end of May, according to JTL Employee Benefits.

Pension transfers hit all-time high

Barnett Waddingham’s report also explored the impact of high levels of transfers out of DB schemes. According to the Office for National Statistics, more than £10.6bn of assets were transferred out of final salary schemes in the first quarter of 2018 – the highest yet recorded. 

“The impact is starting to show on pension scheme balance sheets in the sense that we are seeing both the asset and liability side of the balance sheet reduce faster than expected, as the amount of benefits being paid out has increased,” Barnett Waddingham’s Hooper added.

“The net impact of higher benefit payments will be less noticeable in any given year but the impact of any gains on members taking transfer values will accumulate over time and has the potential to be significant if the trend continues.”

Tom Selby, senior analyst at investment platform AJ Bell, said there had been a “perfect storm for DB transfers in the UK”.

“A combination of the attractiveness of the pension freedoms, high transfer values and headlines about high-profile companies – most notably BHS and Carillion – going bust all undoubtedly influenced people’s decision to exit,” he said.

However, Selby questioned whether the assets flowing out of the DB sector had yet to have a material impact on the overall level of deficits.

“Most schemes will be offering transfer values close to fair value – so I wouldn’t necessarily expect that to have a huge impact on the deficit that schemes are reporting,” he said. “It is much more likely to be linked to rising gilt yields than anything else.”