FTSE 350 pension deficit almost halved as companies increase contributions

The aggregate pension deficit of the top 350 performing firms in the UK has fallen by £27bn to £35bn since the beginning of 2017, according to new data.

Barnett Waddingham’s analysis shows increased contributions from firms, and the strong performance of pension scheme investment portfolios has led to the deficit decrease, which now accounts for just 17 per cent of the companies’ total pre-tax profits, compared to 70 per cent just 18 months ago.

This reduction of the pension deficit in relation to a percentage of companies’ profits comes after a period of steady and sustained increase between 2011 and 2016.

Barnett Waddingham partner Nick Griggs is cautious: “While this is positive news, it would not take much to tip the balance the other way. Our analysis suggests that a 0.5 per cent fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE 350 DB schemes up to £85bn.”

FTSE 350 firms seem to be committed to reducing DB pension scheme deficits as this is the third year in a row that they have increased their deficit contributions, while the average deficit contributions paid by the companies as a proportion of dividends remained at 10 per cent.

However, the majority of the companies still posting a deficit are expected to still be over 10 years from disclosing a DB surplus.

Additionally, Barnett Waddingham said there could be concerns from The Pensions Regulator over 43 firms that increased their dividend payments to shareholders whilst simultaneously reducing deficit contributions. However, Barnett Waddingham said some of these companies will have agreed to pay more in the short term. As they have already done their part in reducing the DB deficit, Barnett Waddingham suggests it is right for them to return to more normal contribution levels.

Despite the positives, there is concern over the future, as Griggs explained: “With the health of the UK and global economy threatened by a lack of progress with Brexit and the threat of a trade war from Trump’s ‘America First’ assault, there could be a major impact on the size on pension deficits and the ability of FTSE 350 companies to pay the contributions needed to clear these.”

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