UK FTSE 100 companies with defined benefit (DB) schemes could face a “huge” increase in pension costs over the next three years, which could trigger the closure of most if not all of the remaining schemes, according to consultancy JLT Employee Benefits.
It said ongoing costs could double from around £7bn per annum to £14bn (€16bn) over the next three years.
It based this projected jump on its findings that net employer contributions for a typical DB scheme have doubled from 26% to 52% of employment costs over the last three-year actuarial valuation cycle, although it said total cash-contribution costs are probably even higher after allowing for the “massive” increase in funding required to pay down deficits.
The consultancy said the increase in costs means “those companies still holding on to their DB pension schemes are not expected to continue doing so for much longer”.
Charles Cowling, director at JLT Employee Benefits, said: “With actuarial valuations coming up for many FTSE 100 pension schemes, 2016 and 2017 could see a huge increase in DB pension costs for those employers that still provide final salary pensions.
“It is difficult to conceive that such a prospect wouldn’t lead the schemes’ sponsors to take some kind of drastic action to mitigate those expenses, particularly as large pension deficits can have a detrimental impact on the company’s financial health and, therefore, its share price and dividend payments.”
According to JLT research, only 23 companies still provide DB benefits that incur ongoing service cost of more than 5% of total payroll.
Household name companies such as HSBC, Marks & Spencer and Tesco have closed their DB schemes to all employees in the past year, highlighted JLT.
United Utilities was going to close its DB scheme but withdrew its plans and the consultancy said “a fresh consultation on pension provision is expected”.