More than half of the top 100 listed firms in the UK will be able to secure an insurance buyout for their defined benefit (DB) schemes within 10 years, according to a report by consultancy Barnett Waddingham.
The firm’s research paper – FTSE 100 dividends vs deficit contributions – showed that 55% of FTSE 100 company DB schemes could secure a buyout by 2029. This figure increased to 70% if companies diverted an extra 6% of profits into these pension schemes, Barnett Waddingham said.
If 7% more of current shareholder payouts were put into contributions, then 30% of FTSE 100 schemes would be in a position to conduct a buyout in the next five years, the consultancy reported.
Combined post-tax profits of FTSE 100 companies with DB schemes rose from to £134bn (€149bn) in 2018, from £57bn in 2009, it said. However, as profits have risen, payments to shareholders – through dividends or share buybacks – have risen even faster.
In contrast, deficit contributions to DB schemes fell by 10% over the same period to £8.3bn per year, Barnett Waddingham said.
Putting a bigger share of profits into pension schemes would drastically accelerate the endgame journey, the consultancy said, and allow companies to de-risk much sooner.
Stepping up contributions was also the best way to keep potential regulatory action at bay, the group added. The Pensions Regulator (TPR) has been scrutinising the balance between dividends paid to shareholders and contributions to pension funds.
Nick Griggs, head of corporate consulting at Barnett Waddingham, said: “Political instability and economic uncertainty is growing, and has the potential to disrupt both pension scheme deficits and companies’ abilities to pay them down.
“And following record dividends, and recovering profits, many companies will also be coming under increasing pressure from TPR to adequately fund their DB pension schemes and strike a more even balance between payments to shareholders and those to plug scheme deficits.
“Having a robust, coherent plan in place for the DB endgame journey will be the best defence against any intervention from TPR, as it will take comfort from the framework that has been put in place.”
Griggs said tackling pension liabilities had been a key challenge for FTSE 100 companies since the financial crisis.
“Thankfully, the total pension deficit has been slowly shrinking on the back of recovering asset prices and the contributions paid by companies,” he said. “The DB endgame is increasingly a realistic short-term focus for many companies and the dividend versus deficit contribution balance is a key lever for those nearing the end of their journey.”