FTSE 100 DB pension risk falls by 23.5% since 2017

The aggregate risk across FTSE 100 defined benefit pension schemes has fallen by 23.5 per cent since 2017, according to Cardano and Lincoln Pensions.

The latest Worry Index research from the firms seeks to provide a single measure of the overall safety (or not) of DB schemes. This year’s figure is the lowest level for the past four years. This reflects positive investment returns, additional sponsor contributions and a relatively benign environment for the sponsor covenant, the firms said.

Since 2015, the DB pension risk within FTSE 100 schemes has reduced by 9.4 per cent. Cardano and Lincoln Pensions started publicly publishing its Worry Index score in 2017 as part of efforts for greater transparency around the pensions risk underwritten by the corporate landscape. Cardano chief executive Kerrin Rosenberg described the results as “encouraging”.

However, one in eight FTSE 100 companies with DB obligations are still in the ‘worry zone’ and are still vulnerable, particularly in the event of a major economic shock such as that experienced in 2008. Under a stress scenario, the aggregate FTSE 100 pension deficit would still increase by an estimated £97bn, leaving some companies with a pension deficit bigger than the value of their sponsor.

Risks are particularly concentrated in the consumer services industry, driven by the retail sector, which has one of the highest worry scores of any FTSE industry. One in three retailers with DB liabilities is in the worry zone (DB pension deficit representing at least 30 per cent of market capitalisation), prompting a wider analysis of the position of this market segment across the FTSE 350.

Five of the 11 FTSE 350 retailers with DB obligations are running risks which threaten their ability to withstand stress scenarios, a finding which bears out the broader challenges currently facing the UK’s high street. In the past year, tougher trading conditions have claimed a number of high street stalwarts including Maplin and Toys ‘R’ Us with a number of others such as House of Fraser being rescued from administration through the injection of new capital; in many cases, the pension schemes of failed business are destined for the Pension Protection Fund (PPF).

Commenting, Lincoln Pensions chief executive Darren Redmayne: “As an industry, we must get ever more sophisticated in our assessment of risk. There is still too much focus on deficit figures – but this is just one measure of underlying risk. A large deficit may be tolerable if there is a robust covenant standing behind it: a pension is only as good as the company or entity supporting the risk.”

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