Diverting an extra 6% of profits into companies’ pension schemes would allow 70% of FTSE 100 DB pension schemes to buyout in the next decade, according to the latest research from Barnett Waddingham.
On present trends, one in five companies will be in a position to buy out their DB obligations in the next five years, the ultimate objective for most companies to eliminate their pension scheme risk. 55% will be able to do so in the next decade. This is a result of strong investment returns over recent years and the deficit contributions paid by companies.
The post-tax profits of FTSE 100 companies with DB schemes stood at £134bn in 2018, up from £57bn in 2009. As profits have risen, payments to shareholders, whether dividends or share buybacks, have climbed even more rapidly. In 2018, companies paid out £120bn to shareholders, up 171% compared to 2009. By contrast, deficit contributions to DB schemes have fallen by 10% over the same period to £8.3bn per year.
Over the last decade, companies have paid around £82bn into their DB schemes to reduce funding deficits – around just one eighth of the £636bn paid out to shareholders over the same period, and equivalent to less than 10% of total profits generated over the period.
Diverting a greater share of company profit towards contributions would drastically accelerate the endgame journey and allow companies to de-risk far more rapidly. Doubling companies’ annual pension contributions to £16.6bn would mean that 30% of schemes would be able to buy out their DB liabilities in five years, and 70% within the next decade. Such an additional contribution would account for just 6% of FTSE 100 pre-tax profits. Funding this directly through a reduction in dividends would lower payouts to shareholders by just 7% each year, to £111bn.
A more radical approach would see faster progress still; increasing current deficit contributions by five times would put 60% of FTSE 100 schemes in a position to buy out in the next five years. Such a shift would still see companies, on average, pay out three times as much to shareholders than into pension schemes, yet greatly reduce the length of time that a DB pension scheme liability will be a problem.
Nick Griggs, Head of Corporate Consulting and Partner at Barnett Waddingham, said:
“Getting to grips with pension liabilities has been a key challenge for the FTSE 100 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. 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.
“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 The Pensions Regulator 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 The Pensions Regulator, as it will take comfort from the framework that has been put in place.”