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IPE special report May 2018

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Top UK companies now spend more on past promises

UK - For the first time ever, FTSE100 companies will spend more on past employee pension promises than those to current staff, according to the annual KPMG Pensions Repayment Monitor Survey.

The survey analysed the annual reports of those FTSE100 companies running DB schemes in the UK.

Previous surveys have shown the norm to be a 2:1 ratio between companies' DB cash spend on new benefits for existing employees and deficit funding for past employment. But for the first time, spending on each is expected to be equal over the next twelve months.

Furthermore, within five years, FTSE100 companies could be spending four times as much on past liabilities as on new benefits for employees, KPMG says.

Mike Smedley, pensions partner, KPMG, says: "The fact we are now reaching this point graphically illustrates the increasing unaffordability of DB schemes. Unless companies and their pension scheme trustees can work together to ensure that pension funding can be managed in a way that does not impact on companies' wider financial flexibility, this is likely to result in more and more companies opting to close DB schemes altogether."

The combined disclosed pension scheme deficits for FTSE100 companies doubled from £20bn to £40bn between end-2007 and 2008. The survey says deficits have since further increased, despite significant contributions by companies, and estimates that the aggregate deficit could have reached £80bn by end-June 2009.

Unsurprisingly, the survey also warned that the proportion of companies that cannot pay off their deficit from discretionary cash flow in any realistic time frame has increased from 15% last year to 22% at present, the highest level in three years.

The survey did however observe that over 94% of FTSE100 companies could pay their pension deficits within a year if they added back dividends and capital expenditure to discretionary cash flow.
 

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