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UK pensions 'blighted' by regulatory changes, says LCP

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  • UK pensions 'blighted' by regulatory changes, says LCP

UK – Constant regulatory and legislative change is still blighting pensions in the UK, and is to blame for the demise of traditional final salary schemes in the country, a partner at LCP has said.

Pension deficits crept higher in the last 12 months, according to the annual Accounting for Pensions report from the consultancy, with the combined IAS 19 deficit of FTSE 100 pension schemes at £43bn (€49.8bn) on June 30 compared to £42bn the same the last year.

Bob Scott, LCP partner and author of the report, said: "Pension planning continues to be blighted by seemingly constant regulatory and legislative change."

Reflecting on some of the regulatory changes from the past 12 months, he cited the introduction of auto-enrolment, the flat-rate state pension reform with the end of contracting-out and changes to the IAS19 accounting standard as some of those impacting the industry.

"Is it any wonder that the past 20 years have seen traditional final salary pension schemes phased out to be replaced largely by lower-quality defined contribution schemes?" he said.

Liabilities at FTSE 100 pension schemes were £490bn in the year to June 30, against assets of £447bn, with companies having made £21.9bn of contributions in the period, the report showed.

The overall level of cover was 91%, which LCP said contrasted with the picture painted in its first accounting for pensions report 20 years ago.

Back then, FTSE 100 pension scheme assets had covered 120% of liabilities and companies had been able to take pension contribution holidays.  

Pension surpluses had then been a draw for corporate buyers, but with the average pension liability now equivalent to 45% of market capitalisation, companies with large DB schemes were now less appealing, LCP remarked.

Pension schemes' holdings in equities grew over the year to 36.4% of total assets from 34.8% a year earlier, as equity values rose over the period and gilt yields became increasingly unattractive, LCP said.

However, it commented that the figure was still nowhere near the near 70% average equity allocation observed in 2001.  

The closure of DB schemes was continuing, with 39 FTSE 100 companies now only offering DC pensions, up from 1996 when just two companies were bucking the trend – broadcaster BskyB and Foreign & Colonial.

Over the course of 2012, seven more companies closed or proposed closing their DB schemes to future accrual – including HSBC and Kingfisher.

Some 61 FTSE 100 companies had DB schemes which were still open to future accrual, but that number was expected to fall further as companies reviewed their options when contracting-out came to an end in 2016, LCP said.

It noted that changes to the IAS19 accounting standard meant companies had to disclose pension deficits in full on their balance sheets from 2013, and in many cases show a lower figure for interest on their pension scheme assets.

"These measures are expected to increase balance sheet liabilities by £20bn and reduce pre-tax profits of FTSE 100 companies by over £2bn," it said, adding that UK healthcare giant GSK had predicted this would have reduced its profit by £92m in 2012.

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