£150bn to go backwards - lane clark & peacock · at a glance summary 8 key findings the ftse...

£150bn to go backwards LCP Accounting for Pensions2017

For further information please contact Bob Scott, Nick Bunch or the partner who normally advises you.

This report may be reproduced in whole or in part, without permission, provided prominent

acknowledgement of the source is given. This report is not intended to be an exhaustive analysis of

company reporting under IAS19. Although every effort is made to ensure that the information in this

report is accurate, Lane Clark & Peacock LLP accepts no responsibility whatsoever for any errors, or

the actions of third parties. Information and conclusions are based on what an informed reader may

draw from each company’s annual report and accounts, and from other publicly available information.

None of the companies have been contacted to provide additional explanation or further details.

© Lane Clark & Peacock LLP August 2017

Over the last 10 years, FTSE 100 companies have paid around £150bn into their defined benefit pension schemes, but their accounting position has worsened. How has this happened?

2 LCP Accounting for Pensions — 2017

Contents

4IntroductionFrom Bob Scott

At a glance summary

8Key findingsThe FTSE 100 accounting deficit

How have companies been managing their pension commitments?

Analysis of pension disclosures

24Key assumptionsLife expectancy

Discount rates and inflation

Increases in pensionable pay

34Setting accounting discount ratesLCP Treasury Model case study

36AppendicesFTSE 100 accounting disclosure listing

FTSE 100 accounting risk measures

3LCP Accounting for Pensions — 2017

IASB

The International Accounting Standards Board


Welcome to our 24th annual survey of FTSE 100 companies’ pension disclosures.Since 2005, when the Pensions Regulator came into being, and particularly

since 2008 in the wake of the financial crisis, companies have been pressed to

pay ever higher contributions to fund their pension schemes. And FTSE 100

companies have responded to this pressure by contributing in excess of

£150 billion to their pension funds over the past 10 years.

Asset values have risen, from around £350 billion in 2007 to over £600 billion

today, reflecting a healthy compound growth rate of over 6% pa, after allowance

is made for net benefit payments of around £50 billion. And yet the accounts

of FTSE 100 companies show that they still have a collective pensions deficit –

around £17 billion as at 30 June 2017. The reason for this is that liability values

have grown even more quickly. And, if the IASB gets its way, IFRIC 14 could

mean companies being required to disclose even larger pension liabilities on

their balance sheets.

For some companies, the increase in liability values has been remarkable.

The same factors that have driven up liability values have also seen the cost of

providing final salary pensions rise to unprecedented levels. A company that

provides its employees with a traditional “1/60th” scheme, with full indexation

and survivors’ benefits, would face a current accounting cost in excess of 50%

of salaries.

Companies also face increased costs from other quarters, including the national

living wage, the apprenticeship levy and, for those who have been paying

minimum auto-enrolment contributions, an increase from 1% to 3% over the

next two years in the required rate. Not to mention risks arising from the Brexit

process.

As a result, it is not surprising that companies are increasingly looking for

ways to minimise the amount they are required to contribute in the short

term to support their legacy defined benefit arrangements, and to optimise

the way that their pension liabilities are presented in their accounts. To avoid

over-stating their liabilities, we’ve seen a number of initiatives to address this,

including adopting new methods of setting accounting assumptions (see

page 34), modifying assumptions about how long members will live, closing

to further accrual and implementing non-cash solutions to provide security to

pension schemes.

1. Introduction

BT Group disclosed pension liabilities of

£60 billion in its March 2017 accounts, up from

£50 billion a year earlier.


1. Introductioncontinued

The debate continues as to whether people are saving enough. Whilst many companies no doubt wish to help all their employees save, some may be limited in what they can do.

Meanwhile, the debate continues as to whether people are saving enough.

Whilst many companies no doubt wish to help all their employees save, some

may be limited in what they can do by the need to pay substantial amounts to

cover the deficit in their defined benefit scheme and by the lack of an accepted

“middle ground” pension arrangement that comes at an affordable cost.

It is not only Frank Field who has expressed concern about shareholders

getting a bigger slice of the cake than the pension scheme does. And, despite

their persistent deficits, FTSE 100 companies were still able to pay four times

as much in dividends in 2016 as they did in pension contributions. Indeed, if

we exclude the £4.2 billion paid by RBS to its pension scheme as a one-off

contribution, dividends were more than 5 times the pension contributions paid.

Looking just at companies with 31 December year-ends, 39 declared pensions

deficits totalling £37 billion. Those same companies paid out £39 billion in

dividends during 2016.

Signs are that the Pensions Regulator will get tougher with companies that

unduly prioritise their shareholders. Let's hope that any extra contributions that

companies pay in future will have a bigger impact on the pensions deficit than

in recent years.

“Bugger the share price, what about this pension liability?”Frank Field MP

Bob Scott Partner

Watch Bob Scott discuss the key findings of the report at vimeo.com/lcpactuaries/afp2017

https://vimeo.com/lcpactuaries/afp2017

https://www.lcp.uk.com/our-experts/b/bob-scott/

Pension schemes versus shareholders

Assumed life expectancy falls

See page 21 See page 26

28FTSE 100 companies paid

four times as much in dividends in 2016

as they did in contributions

to their defined benefit

pension schemes.

companies reduced their

assumed life expectancy

(on average the difference

was half a year).

£150bn for funding levels to go backwards

Over the last 10 years, FTSE 100 companies

have paid around £150 billion into their defined

benefit pension schemes…

Placing the blame on liability values

Liability values rose by more than 85%.

See page 9

See page 9

See page 10

2007

2016 2015

2007

2017

2017 2016

2017

£12bnsurplus

£46bn £13.3bn

£336bn

£17bndeficit

£17bn £17.3bn

£625bn


Deficit 2016 vs 2017Contributions by FTSE 100 companies into their defined benefit schemes

The improvement in

the net deficit is due

to strong returns on

assets and a record

level of contributions.

…but the continued

rise in liability values

has meant that the net

accounting position

has worsened.

Accounting deficit in respect of UK pension liabilities

See page 20

Highest contribution amount ever


FTSE 100 pensions at a glance

The DB vs DC savings gap

The trend to reduce investment risk

See page 12

Switching from RPI to CPI

The liability for FTSE 100 companies would be

£30bn lower, if those using RPI for increasing benefits each year were able to switch to CPI.

See page 32

No traditional pensions for new employees

See page 12

Liabilities may be being overstated

If the FTSE 100 were all to adopt

the LCP Treasury Model to set their

discount rate the combined accounting

liability for pensions would reduce by

£25bn

55% 3%

See the case study on page 34

The typical accounting cost of a traditional final salary pension scheme is now

But for DC auto enrolment FTSE 100 companies will only have to pay a minimum of

in 2015to

in 201628% 26%

27


still provide traditional final salary accrual for a reducing number of their longest serving employees…

...but none offer this to new recruits.

The average allocation to equities has continued to reduce

Many of the FTSE 100 now also have significant hedging strategies in place in their pension schemes to protect against the impact of changes in bond yields.

of salaries

of salaries

See page 15


2. Key Findings

In this report we have analysed 89 FTSE 100 companies reporting in 2016.

11 companies have been excluded as they do not sponsor a material defined

benefit pension scheme. A full list and summary details of the 89 companies’

key pension disclosures are set out in appendix 1.

The information and conclusions of this report are based solely on detailed

analysis of the information that companies have disclosed in their annual report

and accounts and other publicly available information. We do not approach

companies or their advisers for additional information or explanation.

We have concentrated on the financial position of the defined benefit schemes

in which the companies’ employees and former employees participate. Some

companies offer post-retirement healthcare, which we have excluded from our

analysis where possible.

All of the companies analysed have reported under international accounting

standards (IAS19 for pension costs) as currently required under EU regulations.

Bob ScottPartner


It is not surprising that companies are increasingly looking for ways to minimise the amounts they are required to contribute in the short term to support their legacy defined benefit arrangements.


2. Key findingscontinued

Following the Brexit vote last year, the deficit increased to almost £80 billion at

the end of August 2016 – the highest level since 2009 – before steadily reducing

over the remainder of 2016 and the first half of 2017.

Overall, this has resulted in the total net deficit reducing by £29 billion from the

position at 31 July 2016 disclosed in last year’s report.

The FTSE 100 accounting deficitWe estimate that the combined FTSE 100 pension deficit in respect of UK

liabilities was £17 billion at the end of June 2017, reflecting total IAS19 liabilities

of £625 billion against assets of £608 billion.

The chart below shows how the accounting deficit has developed over the past

five years. Our figures include unfunded pension promises but exclude, where

possible, the overseas pension schemes sponsored by FTSE 100 companies

and any employee benefits other than pensions. We have also excluded the

impact of any adjustment arising from balance sheet asset limits or funding

requirements.

Estimated IAS19 position for UK schemes of FTSE 100 companies

the combined FTSE 100 pension deficit in respect of UK liabilities.

£17bn

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

Jun

2012

Dec

20

12

Jun

2013

Dec

20

13

Jun

2014

Dec

20

14

Jun

2015

Dec

20

15

Jun

2016

Dec

20

16

Jun

2017

£ b

illio

n


In late 2008 the yield on the iBoxx AA over 15 year corporate bond index

peaked at more than 7.5% pa. However, since then there has been a steady

fall in yields – with the index hitting a low of just under 2% pa in August 2016.

Although yields then rose sharply, the general downward trend began again in

early 2017.

This fall in bond yields has led to a sustained rise in liability values that has

meant that many companies continue to disclose an IAS19 deficit despite

paying significant amounts into their pension schemes. Ten years ago

FTSE 100 companies had a net pension surplus of £12 billion, based on total UK

accounting liabilities of £336 billion. Since then companies have paid over

£150 billion into their pension schemes, but with liability values rising by more

than 85%, they now find themselves with a net accounting deficit of £17 billion.

Source: iBoxx


Corporate bond yields

Under IAS19, pension liabilities are valued by reference to the yield available on

high quality corporate bonds – all else being equal, this means that when yields

fall, liability values increase and vice versa.

The chart below shows how UK corporate bond yields have varied since the

start of 2008, just prior to the height of the UK “credit crunch”.

UK AA rated corporate bond yields

1%

2%

3%

4%

5%

6%

7%

8%

December

2007

December

2008

December

2009

December

2010

December

2011

December

2012

December

2013

December

2014

December

2015

December

2016

Nom

inal

ann

ual y

ield

(%

pa)

has been paid by FTSE 100 companies into their defined benefit pension schemes over the past 10 years.

£150bn



For individual companies, the impact could be very different depending on the

level of hedging their pension schemes have in place. Most of the FTSE 100's

pension schemes are now relatively well hedged against the impact of changes

in bond yields on liability values, but very few will have had this hedging in

place since 2007.

Increasingly companies are looking for other ways to mitigate the increase in

liability values when preparing their accounting disclosures – for example, by

adopting improved methods of setting their accounting assumptions, such as

through LCP’s Treasury Model for setting discount rates. See the case study on

page 34 for further details.

How have companies been managing their pension commitments?

Reductions in defined benefit pension provision

None of the companies we have analysed provide traditional final salary

pensions to new employees. However, there are currently four FTSE 100

companies that provide some form of defined benefit pension provision as

standard to new recruits:

• Croda International provides a career average revalued earrings (CARE) scheme.

• Diageo, Johnson Matthey and Morrisons all provide cash balance schemes.

The following companies disclosed in their accounts that they had either closed

their defined benefit pension schemes to future accrual, or planned to do so in

the near future:

• ITV closed the defined benefit sections of its pension scheme to future benefit accrual with effect from 28 February 2017.

• Smith & Nephew closed its UK pension plan to future accrual in December 2016, resulting in a $44 million gain being disclosed in its 2016 accounts.

• Carnival announced that the multi-employer pension scheme it participates in was fully closed to future accrual in March 2016.

• In its 2017 accounts, Royal Mail has announced that it will close its pension scheme to future accrual with effect from 31 March 2018, by which point it expects its current surplus will have been fully used to meet additional benefit accrual.

• GKN has recently announced that it has closed its defined benefit pension scheme to future accrual.

In addition, Marks & Spencer had previously announced that it would close its

defined benefit scheme to future accrual during 2016 and Standard Life had

announced that it would close its defined benefit pension plan to future accrual

in April 2016.


After allowing for these changes, only half of the FTSE 100 continue to provide

any form of ongoing defined benefit accrual to any of their UK employees, with

the split of pension provision illustrated in the chart below. This shows that only

27 FTSE 100 companies continue to provide traditional final salary pensions to

any of their UK employees.

Number of FTSE 100 companies providing continuing defined benefit pension provision

No defined benefit (DB) scheme

Non-UK DB scheme only

UK DB scheme closed to accrual

UK DB scheme - traditional final salary

UK DB scheme - final salary, with cap on salary increases

UK DB scheme - non-final salary

11

34

27

11

11

6

Even where companies are continuing to provide ongoing defined benefit accrual,

this will be for a dwindling number of employees, as most companies closed their

defined benefit pension schemes to new employees many years ago.

Pension scheme closures to future accrual have been driven in part by the

increasing cost of provided a defined benefit pension. The chart below

illustrates how the IAS19 cost of accrual in a typical 60ths final salary scheme

would have risen due to changes in yields and longevity assumptions over the

last 8 years, with the cost more than doubling over this period.

IAS19 cost of accrual in a typical 60ths final salary scheme

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

Jul2009

Jul2010

Jul2011

Jul2012

Jul2013

Jul2014

Jul2015

Jul2016

Jul2017

% o

f sal

arie

s



We expect to see more closures of DB pension schemes in the coming years.

However, as the number of employees in DB pension schemes continues to fall

naturally - due to retirements and employee turnover - some employers may

be willing to absorb the high cost for an increasingly small group of employees,

rather than spend time and money on a formal closure exercise.

Where companies have chosen not to close their pension schemes to future

accrual, many have made other changes to limit the cost of the additional

liabilities being built up:

• Babcock disclosed several changes to its pension schemes in its 2016 accounts, including a cap on pensionable salaries. In its 2017 accounts it stated that it will be consulting with employees of its two largest schemes on changes to better share costs.

• Centrica has introduced a reduced pensionable salary cap for two of its pension schemes resulting in an £80 million accounting gain. Member contributions have also been increased and inflationary increases for future pension accrual have been reduced to the lower of CPI inflation and 2.5% pa.

• Croda changed its UK pension scheme from a final salary basis to a career average revalued earnings (CARE) scheme with effect from April 2016, with pensionable earnings capped at £65,000 pa. In addition, indexation of pensions in payment for future accrual has been moved from RPI to CPI inflation.

• In October 2016 RBS announced that it would be increasing employee contributions in its UK defined benefit pension schemes by 2% of salary.

As mentioned in previous Accounting for Pensions reports, in 2010 the

Government changed the measure of inflation applying for statutory minimum

increases to pensions from RPI inflation to CPI inflation. Depending on the

precise wording of pension scheme rules, this resulted in an immediate one-off

reduction to many companies' pension liabilities.

Despite this change being announced more than seven years ago, the issue of

which inflation measure to apply for pension increases continues. A number

of court cases are currently in progress and International Airlines Group has

recently lost legal action against the trustees of the British Airways pension

scheme who granted a discretionary increase on top of the CPI inflation

increase required by the rules.



Managing pension risk

As well as stopping the build-up of further defined benefit pensions, FTSE 100

companies have been looking at ways of reducing the risk associated with

the pensions that have already been promised to their current and former

employees.

Liability management exercises have been a relatively common way of

achieving this in recent years. For example, under a pension increase exchange

(“PIE”) exercise, pension scheme members are offered a higher level of pension

in exchange for giving up some, or all, of the future increases that they would

be entitled to – thereby removing inflation risk from the pension scheme. These

exercises can also result in a saving to the employer depending on the terms of

the exercise.

In 2016, two FTSE 100 companies disclosed that they had completed, or would

shortly be completing, a pension increase exercise:

• During 2016 AstraZeneca carried out a PIE exercise which resulted in a £54 million past service credit being disclosed in its 2016 accounts.

• Vodafone disclosed that its main UK defined benefit scheme would be carrying out a PIE exercise between May and August 2016.

As pension schemes mature and the time horizon for benefit payments

decreases, companies and pension scheme trustees have typically looked to

reduce the investment risks posed by the pension scheme.

This is of increasing importance as schemes close to future accrual and ongoing

contributions reduce because pensions and other benefits then need to be paid

out of investment income or by realising assets.

With increasingly complex investment strategies – some of which are not fully

explained in accounting disclosures – it has become more difficult to split



Although this shows that around 55% of pension scheme assets are now

invested in bonds, many pension schemes have used derivatives to put in place

additional hedging to protect their funding position against changes in interest

rates.

0%

20%

40%

60%

80%

100%

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

OtherBondsEquities


FTSE 100 pension scheme assets into different asset classes. However, the

general trend away from equities does appear to have continued with a modest

movement of assets out of equities and into bonds and other asset classes

during 2016. This is illustrated in the chart below.

Overall asset allocation for FTSE 100 companies with December year-ends

of pension scheme assets are now invested in bonds.

55%


Pension risk disclosure

Since we started our Accounting for Pensions survey 24 years ago, the reporting

of pension risk in listed companies’ accounts has improved hugely. The revised

disclosures required under the updated 2011 version of IAS19 have helped in this

regard, but some companies are still not disclosing sufficient detail for informed

investors to understand the level of pension risk they are running. For example

Royal Dutch Shell has pension assets of over £60 billion but provides very little

detail on how these assets are invested.

The introduction of viability statements following updates to the Corporate

Governance Code in October 2014 was expected to improve the prominence

of disclosure of material pension risks in company accounts. However, in 2016

only four FTSE 100 companies referred to pensions directly in their viability

statements – this is despite some of these companies having a pension scheme

which is larger than the size of the business.


In 2016 only four FTSE 100 companies referred to pensions directly in their viability statements.


Analysis of pension disclosuresThe average pensions note runs to just under five pages, with most companies

also having several paragraphs of pension commentary in the main body of

their reports. The longest disclosures were made by National Grid, with 11 pages

of its 2016 report dedicated to pensions, whilst BAE Systems, CRH and ITV all

gave 10 pages of pensions information.

Funding levels

IAS19 takes a snapshot of the accounting surplus or deficit at the company’s

year-end and in most cases this is the number that appears on the balance

sheet.

However, in some cases, complex rules under IAS19 can result in a restriction on

the asset recognised on the balance sheet where a pension scheme is in surplus,

or a higher liability being recognised as a result of the funding agreement in

place with the pension scheme's trustees.

Of the companies we have analysed, 19 were affected by this issue in 2016,

which is the same number as in 2015. Notably, in 2016 RBS changed its policy

in this area and as a result disclosed an additional £3.0 billion liability on its

balance sheet in respect of its main pension scheme.

The International Accounting Standard Board is currently finalising amendments

to this aspect of pensions accounting, which it expects to issue around the end

of 2017. Depending on the details, this could result in material changes in the

amount that companies need to disclose on their balance sheet in future.

However, this complexity aside, of the 89 FTSE 100 companies with material

defined benefit pension schemes:

• 31 disclosed that their funding level had improved since 2015;

• 25 disclosed an accounting surplus, compared to 27 last year; and

• 41 companies reported being less than 90% funded on an accounting basis at their 2016 year-end compared with 31 in 2015.

As was the case last year, Royal Mail disclosed the highest funding level – 193%

as at 27 March 2016, although this had decreased to a funding level of 164% at

26 March 2017.


FTSE 100 companies reported being less than 90% funded on an accounting basis.

41


Changes over 2016

The chart below shows how worldwide funding levels have changed over the

year for the 52 FTSE 100 companies in our report which have December 2016

year-ends.

Ratio of assets to IAS19 liabilities at end December (%)

Ratio of assets to IAS19 liabilities at end March (%)

The average reported IAS19 funding level for companies with December

year-ends was 89% in 2016, representing a decrease from 94% in 2015. This

change in funding position reflects a decrease in corporate bond yields (and an

increase in liability values) for companies reporting at 31 December 2016, offset

for the most part by strong investment returns.

We have shown a similar chart for those companies with March year-ends below.

The average reported IAS19 funding level for these companies was 102% at

March 2017 compared with 106% in 2016 and 103% in 2015.

0

5

10

15

20

under 60 60 to 69 70 to 79 80 to 89 90 to 99 100 to 109 110 or over

Num

ber

of c

ompa

nies

December 2015

December 2016

0

1

2

3

4

5

6

7

8

9

under 80 80 to 89 90 to 99 100 to 109 110 or over

Num

ber

of c

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March 2015 March 2016 March 2017



Benefits earned

Net interest charged

Investment experience& exchange rate dierences

New assumptions & experience Overall movement

in the deficit

100 80 60 40 20 0 20 40 60 80

Factors incresasing deficit Factors decreasing deficit

Contributions

IAS19 sources of deficits and surpluses for companies with December year-ends only (£ billion)

Sources of deficits and surpluses

For the 52 companies with December year-ends, worldwide deficits increased

by £10.1 billion over 2016. This is illustrated in the chart below.

Our analysis shows that contributions paid (£13.0 billion) more than covered the

net IAS19 value of benefits earned over the year (£4.9 billion) and the total net

interest charge (£0.6 billion). However, increases in IAS19 liability values

(£74.5 billion), mainly caused by lower corporate bond yields, were only

partially offset by strong investment returns (£56.9 billion).

Overall, this has led to an increase in deficits of £10.1 billion for these companies.


Pension schemes in relation to their sponsoring companies

The chart below shows the size of accounting liabilities relative to companies’

market capitalisations. The average FTSE 100 company’s pension liability was

38% of its market capitalisation, which is an increase from 34% last year.

Accounting liabilities as a proportion of market capitalisation (%)

2015

2016

0

5

10

15

20

25

30

under 5 5 to 14 15 to 24 25 to 49 50 to 74 75 to 99 100 to 149 150 to 199 200 or over

Num

ber

of c

ompa

nies

is the average FTSE 100 company’s pension liability as a percentage of its market capitalisation.

38%


0

5

10

15

20

25

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

£ b

illio

n

Deficit contributions(defined benefit)

Employer service cost(defined benefit)

Employer definedcontribution costs

Pension schemes continue to pose a very significant risk for certain companies.

For example:

• BAE Systems had pension liabilities of more than 170% of its market capitalisation at its 2016 year-end, and the deficit in its pension scheme was 33% of the value of the company;

• International Airlines Group has pension liabilities of 268% of its market cap (although the deficit was only 7% of the company’s value); and

• GKN had pension liabilities of 80% of its market cap, with the deficit representing 34% of the company’s value.

On average, pension scheme deficits were 4% of market capitalisation which is

the same as in 2015.

We have highlighted the 10 companies with largest liabilities and largest deficit

compared to market capitalisation in appendix 2.

What have companies done to tackle their deficits?

FTSE 100 companies paid contributions totalling £17.3 billion to their defined

benefit schemes in 2016 – the highest amount ever paid. This follows £13.3 billion

of contributions paid in 2015, £12.5 billion paid in 2014 and £14.8 billion paid in

2013.

The chart below shows how company payments, including those to defined

contribution pension schemes, have changed since 2007. We expect to see

contributions to defined contribution schemes become a larger proportion

of the total in future years, as the remaining employees with accrued defined

benefit pensions retire and new employees are, in most cases, auto-enrolled into

DC schemes.


Employer contributions to pension schemes

is the level of contributions paid by FTSE 100 companies to their defined benefit schemes in 2016 - the highest amount ever paid.

£17bn


The increase in total contributions for 2016 is largely due to a £4.2 billion

contribution made by RBS to its main UK pension scheme, which is the largest

ever one-off pension payment made by a UK company. Overall, fewer than half

of the FTSE 100 paid higher contributions during 2016 than in 2015.

The 10 companies that paid the highest contributions to their defined benefit

schemes are shown in appendix 2. BT Group and RBS were the only two

companies to pay more than £1 billion into their DB schemes over their 2016

accounting year. These were also the only two companies to pay more than

£1 billion in 2015.

A comparison of how contributions to defined benefit schemes has compared to

dividends is shown in the chart below.

Employer contributions to DB pension schemes vs dividends


Most companies pay contributions at a rate greater than the IAS19 value of benefits

earned over the year. If IAS19 assumptions were borne out in reality, this excess would

reduce the IAS19 deficit.

0

1

2

3

4

5

6

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Div

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£ b

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Contributions to DB pension schemesDividendsDividends/pension contributions


19 companies paid contributions that were less than or equal to the IAS19 value

of benefits promised over the year. These were:

• Ashtead Group, Morrisons, Next, Royal Mail, Schroders and Standard Life, which all disclosed an IAS19 surplus; and

• Associated British Foods, BHP Billiton, BP, ConvaTec Group, Informa, Micro Focus, Mondi Group, Royal Dutch Shell, Sage Group, Shire, Sky, Vodafone and Taylor Wimpey which all disclosed an IAS19 deficit.

The chart below shows the length of time it would take for IAS19 deficits to be

removed if companies paid contributions at the same rates as they did in 2016

and investments earned returns in line with the IAS19 discount rates. This is an

artificial calculation as IAS19 is not a funding basis. Nevertheless it provides a

way of comparing IAS19 deficits with the contributions paid.

Pension schemes versus shareholders

The following chart shows how pension deficits compare to dividends paid.

Of the 63 FTSE 100 companies that disclosed a pension deficit in 2016, 24

disclosed a deficit that was greater than or equal to the dividends paid to

their shareholders in 2016. However, in 23 cases, the 2016 dividend was more

than double the deficit at the 2016 financial year-end, suggesting that these

companies could pay off their pension scheme deficit relatively easily if they

wanted to. The total deficit for these 63 companies was £53.4 billion, marginally

lower than the total dividends paid of £54.8 billion.


Expected time to pay off IAS19 deficits

2015

2016

0

5

10

15

20

25

30

0 or in surplus

less than 5 years

5 to 9.9 years

10 to 14.9 years

15 to 19.9 years

20 years and over

Num

ber

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FTSE 100 companies paid four times as much in dividends in 2016 as they did in contributions to their defined benefit pension schemes.


The chart below shows the company contributions paid over the 2016 and 2015

accounting years as a percentage of dividends distributed over these periods.

In 2016, seven companies paid more contributions to their pension schemes

than they distributed in dividends, compared to five of these companies in 2015.

2015

2016

0

5

10

15

20

under 50 50 to 99 100 to149

150 to199

200 to249

250 to299

300 to349

350 to399

400 orover

Num

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2015

2016

0

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under 10

10 to19

20 to29

30 to39

40 to49

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90 to99

100 orover

Num

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Percentage of IAS19 deficit that could be paid off with dividends paid in accounting year (%)

Contributions paid as a proportion of dividends paid (%)

This is an area that has come under more scrutiny following the collapse of BHS.

In its 2017 annual funding statement, The Pensions Regulator has stated that it will consider investigating schemes where there is a funding deficit and the total distribution to shareholders is higher that the level of contributions being paid to remove the deficit, unless:

• the deficit is expected to be removed over a relatively short period; and

• the scheme has a low risk investment strategy.


3. Key assumptions

In this section we consider the various assumptions used to place a value on

pension benefits under IAS19. Where a company operates pension schemes in

more than one country, we have considered the assumptions used for the UK if

separately given. Where a company has disclosed a range of assumptions, we

have taken the mid-point.

Nick BunchPartner


FTSE 100 companies have been modifying their assumptions about how long their pension scheme members will live, reflecting data that shows there have been more deaths in England & Wales in recent years than previously expected.

https://www.lcp.uk.com/our-experts/n/nick-bunch/

3. Key assumptionscontinued

Life expectancy Under the IAS19 accounting standard, companies are required to disclose

any “significant actuarial assumptions” and we would generally expect this

to include mortality. 71 of 89 companies have provided sufficient information

in their 2016 accounts for us to derive basic mortality statistics – specifically

the life expectancy for a man at age 65 in the UK. The same companies also

provided this information in 2015. Of the remaining 18, all but BHP Billiton, ConvaTec, Croda, Old Mutual, Shire and Sky have provided either non-UK life

expectancies, a range of life expectancies, or narrative description of their

mortality assumptions.

The following charts show the range of life expectancies assumed under IAS19

by FTSE 100 companies for males aged 65 on the balance sheet date.

The average assumed age at death was 87.9 years, which is marginally lower

than in these companies’ 2015 accounts where the average was 88.0 years.

Life expectancy assumptions reported in 2016 UK males aged 65 on the accounting date

2015

2016

0

5

10

15

20

25

30

85.9 or less 86 to 86.9 87 to 87.9 88 to 88.9 89 to 89.9 90 or above

Num

ber

of c

ompa

nies



In the last few years we have noted that the rate of increase in assumed life

expectancy has been slowing and this trend has continued in 2016. To some

extent this reflects UK mortality data which has shown there have been more

deaths than expected in recent years. Whether this proves to be a long-term

trend remains to be seen.

In 2016, 28 companies disclosed lower assumed life expectancy for some or all

of their scheme membership than in 2015, reducing their average assumption by

0.5 years. 30 companies disclosed higher life expectancy assumptions, adding

0.2 years on average.

Research has shown that two of the main factors influencing life expectancies

are socio-economic group and income. In this respect it is interesting to analyse

the FTSE 100 companies’ assumed life expectancies by the sector in which the

company operates.

In the chart below the horizontal bars show the average assumed age at death

for a UK male aged 65 for each sector. The vertical lines show the extent of the

variation within each sector, which in most cases increases with the greater the

number of companies within the sector.

Life expectancy assumptions reported in 2016 split by sector UK males aged 65 on accounting date

This chart shows that the highest average assumed life expectancies are found

in the healthcare and financials sectors. The lowest average assumed life

expectancy was found in the industrials sector.

82

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Age

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2015

2016

FTSE 100 companies lowered their assumed life expectancy for their scheme membership in 2016.

28



Future improvements in mortality

As well as setting assumptions to estimate how long current pensioners will

live on average, companies must also decide how life expectancies for future

pensioners will change as a result of improvements in mortality. The allowance

for future improvements can have a significant impact on the IAS19 value of

pension scheme liabilities, and hence deficits.

69 companies disclosed enough information in their accounts to analyse how

their allowance for future improvements in mortality has changed compared to

2015. The chart below shows the allowance that these companies have made for

increases to life expectancy over the next 20 years.

Additional life expectancy improvements reported in 2016 Improvements for UK male members aged 65 now versus aged 65 in 2036

On average, these companies assumed that UK pensioners retiring at age 65 in

20 years’ time will live for 1.8 years longer than a pensioner retiring today. This is

the same as for these companies in 2015.

Overall, these companies decreased their average assumption for the life

expectancy of a 65 year old in 2036 by 0.1 years, from an assumed age at death

of 89.8 years in their 2015 accounts to 89.7 years in 2016.

2015

2016

0

5

10

15

20

25

30

35

under 0.5years

0.5 to 0.99years

1 to 1.49years

1.5 to 1.99years

2 to 2.49years

2.5 to 2.99years

3 to 3.49years

3.5 years or over

Num

ber

of c

ompa

nies

Increase in life expectancy over next 20 years



Discount rates and inflationThe discount rate is used to calculate a present value of the projected pension

benefits. A lower discount rate means a higher IAS19 value of pension liabilities

and vice versa.

The typical FTSE 100 company has pension liabilities that are linked to price

inflation. A decrease in the price inflation assumption will lead to a lower level

of projected benefit payments, and hence a lower IAS19 value being placed on

those benefits, all other things being equal.

We have analysed the discount rates used by 43 companies and the RPI inflation

assumption of 37 companies with a December year-end, together with the

assumption for CPI inflation disclosed by 20 of these companies. Similarly,

we have analysed the discount rates and the RPI inflation assumption of 15

companies with a March 2017 year-end, together with the assumption for CPI

inflation disclosed by 9 of these companies. The results are summarised in the

charts below.

Discount rates

Under IAS19, the discount rate should be based on “high quality” corporate

bonds and the duration of the corporate bonds should be consistent with the

estimated duration of the pension obligations.

The yields on high quality corporate bonds, and hence the discount rates, will

fluctuate from day to day in line with market conditions.

Discount rates used in December 2015, December 2016 and March 2017 (% pa)

0

5

10

15

20

25

under2.5

2.5 to2.59

2.6 to2.69

2.7 to2.79

2.8 to2.89

2.9 to2.99

3.0 to3.09

3.1 to3.19

3.2 to3.29

3.3 to3.39

3.4 to3.49

3.5 to3.59

3.6 to3.69

3.7 to3.79

3.8 to3.89

3.9 to3.99

4.0 orover

Num

ber

of c

ompa

nies

December 2015

December 2016

March 2017


The average discount rate decreased markedly over the year, from 3.8% pa in

December 2015 to 2.7% pa in December 2016. The average discount rate used by

FTSE 100 companies with a March 2017 year-end was even lower at 2.5% pa.

The spread of discount rates used by FTSE 100 companies with a

December 2016 year-end has stayed the same compared to December 2015,

with a 0.4% spread of rates at both dates.

Hammerson disclosed the highest discount rate for a FTSE 100 company with a

December year-end in their 2016 accounts (2.9% pa in 2016 compared to

3.8% pa in 2015). Aviva, HSBC, Pearson and WPP adopted the lowest discount

rate of 2.5% pa.

IAS19 requires companies to disclose the duration of their pensions liabilities,

allowing us to compare the discount rates used against the duration of the

scheme, as shown in the chart below.

Discount rates used at 31 December 2016 by duration

Most companies use the same assumptions to value both past service and

future service benefits. However, BP, GKN and ITV all disclosed the use of

different assumptions to calculate the “service cost” item in their accounts,

which represents the value of pension benefits accrued over the accounting

year. By reflecting the longer duration of accruing benefits compared to accrued

benefits, companies could assume discount rates that were, on average, higher

by 0.1% pa. This meant they could disclose a lower service cost, and higher

profits, than would otherwise have been the case.

AstraZeneca announced in its 2016 accounts that it will be moving to a similar

discounting along the curve approach from 2017.


0%

1%

2%

3%

4%

0 5 10 15 20 25

Yiel

d / d

isco

unt r

ate

Duration

AA rated corporate bonds Discount rates


Inflation (RPI assumptions)

The chart below shows long-term inflation assumptions as measured by the

Retail Prices Index (RPI). The average RPI assumption of 3.3% pa in

December 2016 and March 2017 was an increase from the average of 3.1% pa in

December 2015.

RPI inflation used in December 2015, December 2016 and March 2017 (% pa)


December 2015

December 2016

March 2017

0

5

10

15

20

Under 3.0 3.0 to 3.09 3.1 to 3.19 3.2 to 3.29 3.3 to 3.39 3.4 to 3.49 3.5 to 3.59 3.6 or over

Num

ber

of c

ompa

nies

Setting accounting discount rates

See page 34 for our LCP Treasury

Model case study.

For December 2016 year-ends, the highest RPI inflation assumption was

3.6% pa, adopted by Reckitt Benckiser Group. At the other extreme 10

companies, AstraZeneca, BAE Systems, BP, Centrica, GlaxoSmithKline, International Airlines Group, Persimmon, Prudential, RBS and Unilever adopted assumptions of 3.2% pa. In general, the December 2016 RPI inflation

assumptions had a similar spread to those used in 2015.

In current market conditions, the use of a higher rate is arguably technically

more correct on the basis that corporate bond yields generally increase as the

term of the bond increases (illustrated in the chart on the previous page), and

the duration of future service liabilities accruing for active members will be

longer than the duration of the liabilities already accrued.


The Bank of England has historically published statistics for future price inflation

implied by gilt spot rates. These showed that long-term RPI inflation implied

by 20 year gilt spot rates was around 3.7% pa at the end of December 2016.

This suggests that, in order to justify an assumption much lower than this for

future RPI inflation, companies may be allowing for a significant “inflation risk

premium”. This represents the theoretical return that investors are willing to

forgo when investing in index-linked gilts, in return for the inflation protection

that these assets provide.

In practice, it is the discount rate net of assumed future price inflation which is

the key assumption.

The chart below shows the difference between the discount rate and the

assumption for RPI inflation (the net discount rate) for companies reporting as

at 31 December 2015, 31 December 2016 and 31 March 2017. It shows that the net

discount rate has decreased since December 2015, from an average of

0.7% pa to -0.6% pa at 31 December 2016. In March 2017 this had decreased

again to -0.7% pa.

Discount rates in excess of RPI inflation used in December 2015, December 2016 and March 2017 (% pa)


0

5

10

15

20

under-0.8

-0.8 to-0.61

-0.6 to-0.41

-0.4 to-0.21

-0.2 to-0.01

0 to0.19

0.2 to0.39

0.4 to0.59

0.6 to0.79

0.8 to0.99

1.0 orover

Num

ber

of c

ompa

nies December 2015

December 2016

March 2017



Difference in RPI and CPI inflation assumptions used in December 2015, December 2016 and March 2017 (% pa)

December 2015

December 2016

March 2017

0

5

10

15

under 0.8 0.8 to 0.89 0.9 to 0.99 1 to 1.09 1.1 to 1.19 1.2 or over

Num

ber

of c

ompa

nies

Inflation (CPI) assumptions

Since 2010 the statutory minimum increases that pension schemes must

provide has been linked to the Consumer Prices Index (“CPI”) rather than RPI.

Historically CPI has generally increased at a lower rate than RPI and is expected

to do so in the future due to the different ways in which the two inflation indices

are constructed.

In practice the inflation measure applying in a particular pension scheme

depends on the wording of the scheme rules and their interaction with the

relevant legislation setting out minimum increases. Many companies have

determined that some of the benefits in their pension scheme should increase in

line with CPI inflation.

As no significant market in CPI linked securities currently exists, market practice

is to derive an assumption for future CPI inflation by deducting a margin from

the assumed future level of RPI inflation. The chart below shows the range of

margins used by companies in their December 2015, December 2016 and

March 2017 year-end accounts, where such information was available.


Increases in pensionable payFor schemes that still relate benefits to pay close to retirement, the assumed

rate of growth in pensionable pay affects the disclosed IAS19 liability and the

cost of benefits being earned. A lower assumption produces a lower projected

pension and hence lower pension liabilities as well as a lower charge to

operating income.

The average assumption for increases in pensionable pay (in excess of the RPI

inflation assumption) has reduced to 0% pa from 0.1% in 2015. Many companies

now have caps on, or have even frozen, increases in pensionable salary and as a

result disclosed a salary increase assumption lower than RPI inflation.

Pensionable pay growth rates used in excess of RPI inflation (% pa)

As the number of active members in final salary pension schemes has reduced,

the assumption for salary growth has become less significant.

At 31 December 2016 the average margin was 1.0% pa which is unchanged from

31 December 2015. At 31 December 2016, Aviva, International Airlines Group, Persimmon, Provident Financial, Schroders, Rio Tinto, Rolls Royce and RSA

used a long-term CPI inflation assumption of 1.1% pa below their RPI inflation

assumption, the largest margin at that accounting date, whilst at 31 March 2017

BT Group has a long term assumption that CPI inflation would be 1.2% pa below

RPI inflation.


2015

2016

0

5

10

15

20

25

30

under -1.5 -1.5 to -0.76 -0.75 to -0.01 0 to 0.74 0.75 to 1.49 1.5 to 2.24 2.25 or over

Num

ber

of c

ompa

nies


What would change for the FTSE 100?Looking more widely at the position of the FTSE 100, if we were to assume

that the FTSE 100 were all to adopt the LCP Treasury Model to set their

discount rate:

• the combined accounting liability for pensions would reduce by around

• the aggregate level of surplus would move back to the levels seen in 2007

4. Setting accounting discount rates

LCP Treasury Model case studyIn the current low yield environment, pension scheme figures have become

increasingly material to company accounts. As a result, companies are

increasingly scrutinising their pension figures to make sure that the methods

and assumptions used are the most appropriate. In many cases, such a review

can show that the accounts may be overly conservative, and more robust

methods can lead to smaller liability values.

The discount rate is the key assumption in pensions accounting and small

changes in this assumption can have a huge impact on accounts. Accounting

standards require that discount rate assumptions are based on the yields of high

quality corporate bonds. Pension schemes are typically expecting to run for the

next 80 years or so, yet there are few true corporate bonds available beyond 30

years. How this issue is resolved can lead to distorted discount rates, and make

pension liabilities appear larger than they should.

We have recently launched the LCP Treasury Model, an improved way to set

accounting discount rates. Whereas a number of conventional models for this

purpose are influenced by changes in gilt yields, the LCP Treasury Model is a

robust model based solely on corporate bonds.

Currently, the LCP Treasury Model reveals that typical discount rates are too

prudent, by up to 0.3% pa. Whilst this may not sound much, we have already

helped over 30 of our clients adopt the LCP Treasury Model with impacts

relative to their original position including:

5% 10%reduction in value of

pension liabilities

reduction in

P&L costs

£25bn

Each of the major auditing firms has accepted discount rates produced using the LCP Treasury Model for several of our clients (of course, as with all approaches, the situation is considered on a case by case basis and depends on each company’s individual circumstances).


Progression of aggregate accounting deficit since 2016

-100

-80

-60

-40

-20

0

20

4030 June 2016 31 December 2016 30 June 2017

Agg

rega

te F

TSE

10

0 d

efic

it (

£bn

)

FTSE 100 deficit FTSE 100 deficit (using the LCP Treasury Model)

Jonathan Griffith Senior Consultant


If the FTSE 100 were all to adopt the LCP Treasury Model to set their discount rate the combined accounting liability for pensions would reduce by around £25bn.

https://www.lcp.uk.com/our-experts/p/phil-cuddeford/

5. Appendices


Nick Bunch Partner

37

Discount rates decreased markedly in 2016, with the average rate falling from 3.8% pa to 2.7% pa. This has resulted in a significant increase in liability values and, for many companies, a corresponding increase in the deficit they have disclosed.

LCP Accounting for Pensions — 2017


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Appendix 1 - FTSE 100 accounting disclosure listing


2015

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739

439

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2.9

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(4)

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N

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77)

3.8

03.

10Y

14,5

35(1

,58

4)

(1,0

17)

3.8

03.

10Y

2,0

81

(235

)(2

35)

ND

ND

N

63

(38

)(2

6)

3.8

03.

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61

2,0

91

2,0

91

3.70

3.20

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3,53

3(4

03)

793.

703.

00

Y

103

(4)

(4)

3.8

03.

20Y

82

(73)

(20

)4

.00

3.20

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20,6

90

49

154

83.

732.

93

Y

121

(27)

(27)

3.70

ND

Y

3,27

0(1

76)

(130

)3.

90

3.0

5Y

1,829

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)(1

36)

3.4

03.

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2,8

1511

211

23.

00

2.8

0Y

227

77

3.10

3.20

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1,932

(38

5)(3

85)

3.8

03.

00

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37,6

3973

673

63.

87

2.9

9Y

49

4(1

5)(1

5)3.

95

3.10

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8,5

97

46

04

61

3.10

3.10

Y

750

(47)

(47)

ND

ND

N

28(5

)(5

)3.

90

3.20

Y

13(1

2)(1

2)N

DN

DN

100

(118

)(2

0)

ND

ND

N

4,13

7(3

9)

(39

)3.

103.

10Y

24,5

05

(1,6

75)

(1,3

75)

3.30

2.9

0Y

2016

Sur

plu

s/(D

efici

t)

Co

mp

any

Year

-end

Mar

ket

valu

e o

f as

sets

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Tota

l£m

Fund

ed

sche

mes

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Dis

coun

t ra

te%

pa

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In

flatio

n1

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a

Dis

clo

sed

m

ort

alit

y?2

Dix

ons

Car

pho

neA

pr

923

(472

)(4

72)

3.50

2.9

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eria

nM

ar71

0(1

6)

183.

40

2.9

0Y

Fre

snill

oD

ec13

(7)

(2)

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ND

N

GK

ND

ec2,

580

(1,9

47)

(1,2

85)

2.58

3.30

Y

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xoS

mit

hKlin

eD

ec17

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84

)(1

,40

4)

2.70

3.20

Y

Gle

nco

reD

ec2,

04

7(3

48

)(3

48

)N

DN

DN

Ham

mer

son

Dec

65

(55)

(41)

2.9

03.

30Y

HS

BC

Ho

ldin

gs

Dec

34,3

84

2,14

92,

149

2.50

3.50

Y

Imp

eria

l Bra

nds

Sep

4,0

51(1

,023

)(3

65)

2.30

3.0

0Y

Info

rma

Dec

146

(38

)(3

8)

2.6

03.

40

Y

Inte

rCo

ntin

enta

l Ho

tels

Gro

upD

ec12

0(6

0)

22.

703.

30Y

Inte

rnat

iona

l Air

lines

Gro

upD

ec24

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(639

)(6

11)

2.6

53.

20Y

Inte

rtek

Gro

upD

ec14

4(3

2)(3

2)2.

70N

DY

ITV

Dec

3,8

33(3

67)

(316

)2.

65

3.23

Y

John

son

Mat

they

Mar

1,875

49

49

3.70

3.0

0Y

Kin

gfi

sher

Jan

2,6

3515

915

93.

60

3.10

Y

Lan

d S

ecur

itie

s G

roup

Mar

215

2525

3.50

3.15

Y

Leg

al &

Gen

eral

Gro

up3

Dec

2,20

0(4

60

)(4

60

)2.

703.

25Y

Lloy

ds

Ban

king

Gro

upD

ec4

5,57

8(2

44

)(2

44

)2.

763.

23Y

Lond

on

Sto

ck E

xcha

nge

Gro

upD

ec6

06

(73)

(73)

2.70

3.30

Y

Mar

ks &

Sp

ence

r G

roup

Ap

r8

,515

832

833

3.4

02.

95

Y

Med

iclin

ic In

tern

atio

nal

Mar

830

(119

)(1

19)

ND

ND

N

Mer

lin E

nter

tain

men

tsD

ec32

(11)

(11)

2.70

3.4

0Y

Mic

ro F

ocu

s3A

pr

19(6

)(6

)N

DN

DN

Mo

ndi G

roup

Dec

118

(156

)(3

1)N

DN

DN

Mo

rris

on

(WM

) S

uper

mar

kets

Jan

3,9

5018

618

63.

703.

20Y

Nat

iona

l Gri

dM

ar24

,537

(1,0

24)

(720

)3.

302.

90

Y

Appendix 1 - FTSE 100 accounting disclosure listingcontinued


2015

Sur

plu

s/(D

efici

t)

Mar

ket

valu

e o

f as

sets

£m

Tota

l£m

Fund

ed

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mes

£m

Dis

coun

t ra

te%

pa

RPI

In

flatio

n1

% p

a

Dis

clo

sed

m

ort

alit

y?2

775

3850

3.18

2.9

8Y

616

125

125

ND

ND

N

2,9

3829

731

53.

703.

10Y

512

1818

3.70

3.0

0Y

66

66

26

23.

753.

00

Y

7,8

199

61

96

13.

80

3.0

0N

34,7

08

(44

4)

(44

4)

3.9

03.

00

Y

1,676

(72)

523.

80

3.30

Y

3,6

60

(38

4)

(18

9)

3.8

53.

05

Y

8,9

16(1

,058

)(5

24)

3.70

3.0

0N

12,5

5434

99

90

3.6

03.

25Y

54,8

41

(2,8

81)

168

ND

ND

N

6,6

193,

382

3,38

23.

503.

10Y

7,19

36

716

33.

92

3.0

2Y

18(1

9)

(19

)N

DN

DN

6,9

88

(70

8)

(69

2)3.

503.

00

Y

937

115

115

3.8

03.

30Y

2,0

87

(46

9)

(459

)3.

303.

00

Y

00

0N

/AN

/AN

0(2

6)

0N

DN

DN

912

(95)

(66

)3.

80

3.10

Y

4,0

17(8

9)

73.

503.

20Y

1,38

8(6

03)

(229

)N

DN

DY

3,75

1(4

58)

(458

)3.

303.

20Y

1,576

(26

0)

(138

)3.

70N

DY

3,9

96

1,378

1,38

63.

703.

15Y

1,88

9(1

77)

(177

)3.

70N

DY

2

016

Sur

plu

s/(D

efici

t)

Co

mp

any

Year

-end

Mar

ket

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e o

f as

sets

£m

Tota

l£m

Fund

ed

sche

mes

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Dis

coun

t ra

te%

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n1

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a

Dis

clo

sed

m

ort

alit

y?2

Nex

tJa

n72

54

658

3.53

3.0

5Y

Old

Mut

ual

Dec

772

154

154

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ND

N

Pea

rso

nD

ec3,

49

711

113

32.

503.

30Y

Per

sim

mo

nD

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06

2323

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Pro

vid

ent

Fin

anci

alD

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3072

722.

553.

25Y

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den

tial

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ec9

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356

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60

3.20

N

RB

SD

ec4

9,2

295,

239

5,23

92.

703.

20Y

Rec

kitt

Ben

ckis

er G

roup

Dec

2,0

02

(154

)(1

3)2.

60

3.6

0Y

RE

LX G

roup

Dec

4,3

67

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93)

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53.

25Y

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Tin

toD

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lls-R

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ldin

gs

Dec

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al D

utch

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llD

ec6

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07)

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al M

ail

Mar

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43,

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93.

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00

Y

RS

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sura

nce

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e G

roup

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he)

Sep

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5)(2

5)N

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nsb

ury

(J)

Mar

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08

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Sch

rod

ers

Dec

1,09

311

811

82.

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40

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ern

Tren

tM

ar2,

04

0(3

10)

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0)

3.6

03.

00

Y

Shi

re5

Dec

345

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Sky

Jun

0(3

3)0

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Sm

ith

& N

ephe

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49

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iths

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l4

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2.70

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urfi

t K

app

a G

roup

Dec

1,66

6(7

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(312

)N

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DY

SS

EM

ar3,

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(132

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3.6

03.

10Y

Sta

ndar

d C

hart

ered

Dec

1,674

(350

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DY

Sta

ndar

d L

ife

Dec

4,9

99

1,66

51,6

752.

703.

25Y

Tayl

or

Wim

pey

Dec

2,13

6(2

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70N

DY



2015

Sur

plu

s/(D

efici

t)

Mar

ket

valu

e o

f as

sets

£m

Tota

l£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te%

pa

RPI

In

flatio

n1

% p

a

Dis

clo

sed

m

ort

alit

y?2

9,6

77(4

,84

2)(4

,70

8)

3.70

3.10

Y

1,70

4(8

37)

(30

3)3.

80

ND

N

15,2

73(1

,28

5)(4

60

)3.

703.

00

Y

3,13

479

793.

103.

00

Y

4,9

56(3

98

)(3

32)

3.0

03.

00

Y

1,89

4(5

54)

(554

)3.

302.

90

Y

1,477

(15)

273.

60

3.20

Y

814

(226

)(6

2)3.

70N

DY

2

016

Sur

plu

s/(D

efici

t)

Co

mp

any

Year

-end

Mar

ket

valu

e o

f as

sets

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Tota

l£m

Fund

ed

sche

mes

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Dis

coun

t ra

te%

pa

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In

flatio

n1

% p

a

Dis

clo

sed

m

ort

alit

y?2

Tesc

oF

eb10

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2(3

,175)

(3,0

58)

3.8

02.

90

Y

TU

I Gro

upS

ep2,

301

(1,2

17)

(439

)2.

30N

DN

Uni

leve

rD

ec18

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(2,2

19)

(1,2

46

)2.

703.

20Y

Uni

ted

Uti

litie

s G

roup

Mar

3,24

627

527

53.

40

3.20

Y

Vo

daf

one

Gro

upM

ar4

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(270

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04

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32(2

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702.

90

Y

Wo

lsel

eyJu

l1,5

58(1

47)

(10

3)2.

40

2.8

0Y

WP

PD

ec9

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(91)

2.50

ND

Y


No

tes:

1 W

e ha

ve li

sted

RP

I as

the

mea

sure

of

infl

atio

n an

d e

xclu

ded

CP

I whe

re it

co

uld

be

iden

tifi

ed in

the

acc

oun

ts.

2 T

his

colu

mn

ind

icat

es c

om

pan

ies

that

dis

clo

sed

suffi

cien

t in

form

atio

n to

cal

cula

te t

heir

ass

ump

tio

n fo

r lif

e ex

pec

tanc

y fo

r a

mal

e p

ensi

one

r in

the

UK

.

3 A

viva

, Leg

al &

Gen

eral

and

Pru

den

tial

ho

ld g

roup

insu

ranc

e p

olic

ies

in r

esp

ect

of

som

e o

f th

eir

ob

ligat

ions

. We

have

incl

uded

the

dis

clo

sed

val

ue o

f th

ese

po

licie

s in

the

fig

ures

sta

ted

abov

e, a

s fo

llow

s: A

viva

£6

33m

(20

15: £

546

m),

Leg

al &

Gen

eral

: £77

9m

(20

15: £

746

m)

and

Pru

den

tial

: £13

4m

(20

15: £

202m

). A

dd

itio

nally

Mic

ro F

ocu

s ho

lds

a lo

ng t

erm

pen

sio

n as

set

of

£15

m (

2015

: £9

m)

whi

ch is

no

t re

cog

nise

d u

nder

IAS

19 b

ut is

incl

uded

in t

he fi

gur

es a

bov

e.

4 T

he fi

gur

es f

or

BA

E S

yste

ms

excl

ude

£51

6m

of

its

2016

defi

cit

(£1,0

53m

in 2

015

) w

hich

is a

lloca

ted

to

eq

uity

acc

oun

ted

inve

stm

ents

and

oth

er p

arti

cip

atin

g e

mp

loye

rs

5 S

hire

acq

uire

d it

s d

efine

d b

enefi

t p

ensi

on

sche

me

dur

ing

its

2016

acc

oun

ting

yea

r. N

o fi

gur

es a

re t

here

fore

sho

wn

for

2015

.

The

20

16 fi

gur

es a

re a

s at

the

end

of

the

acco

unti

ng p

erio

ds

end

ing

in 2

016

. The

20

15 fi

gur

es a

re a

s at

the

sta

rt o

f th

e ac

coun

ting

per

iod

. All

fig

ures

sho

wn

abov

e w

ere

take

n fr

om

IAS

19

dis

clo

sure

s. F

igur

es h

ave

bee

n co

nver

ted

to

po

und

s st

erlin

g w

here

a c

om

pan

y ha

s re

po

rted

fig

ures

in it

s ac

coun

ts in

a d

iffer

ent

curr

ency

.

Trad

itio

nally

, so

me

com

pan

ies

wit

h ov

erse

as p

ensi

on

pla

ns d

o n

ot

fund

the

m v

ia a

n ex

tern

al s

chem

e, in

stea

d b

acki

ng t

he p

ensi

on

pla

n w

ith

com

pan

y as

sets

, whi

ch m

ay r

esul

t in

a la

rger

defi

cit

bei

ng d

iscl

ose

d. W

here

dis

clo

sed

, the

sur

plu

s/(d

efici

t) a

ttri

but

able

to

fun

ded

sch

emes

is a

lso

sho

wn

abov

e.

The

dis

coun

t ra

tes

and

infl

atio

n as

sum

pti

ons

ref

er t

o t

hose

dis

clo

sed

fo

r th

e co

mp

anie

s’ m

ain

UK

sch

eme(

s). W

here

a c

om

pan

y ha

s d

iscl

ose

d a

ran

ge

of

assu

mp

tio

ns, w

e ha

ve t

aken

the

mid

-po

int.

Whe

re a

co

mp

any

op

erat

es p

ensi

on

sche

mes

in m

ore

tha

n o

ne c

oun

try,

we

have

co

nsid

ered

the

ass

ump

tio

ns u

sed

fo

r th

e U

K if

sep

arat

ely

giv

en. “

ND

” m

eans

no

UK

fig

ures

wer

e d

iscl

ose

d.

We

have

exc

lud

ed f

rom

our

sur

vey

the

follo

win

g 1

1 co

mp

anie

s w

ho h

ad n

o e

vid

ence

of

sig

nifi

cant

defi

ned

ben

efit

pro

visi

on:

Ad

mir

al G

roup

, Ant

ofa

gas

ta, B

urb

erry

Gro

up, E

asyj

et,

Har

gre

aves

Lan

sdo

wn,

Hik

ma

Pha

rmac

euti

cals

, Int

u P

rop

erti

es, P

add

y P

ow

er B

etfa

ir, R

and

go

ld R

eso

urce

s, S

t Ja

mes

's P

lace

and

Wo

rld

pay

.

The

fo

llow

ing

fo

ur c

om

pan

ies

have

ent

ered

the

FT

SE

10

0 in

dex

sin

ce 3

1 D

ecem

ber

20

16 a

nd h

ence

are

no

t in

clud

ed in

our

sur

vey:

G4

S, R

ento

kil I

niti

al, S

cott

ish

Mo

rtg

age

Inve

stm

ent

Trus

t an

d S

egro

. The

fo

llow

ing

fo

ur c

om

pan

ies

have

exi

ted

the

FT

SE

10

0 in

dex

sin

ce 3

1 D

ecem

ber

20

16: C

apit

a, D

ixo

ns C

arp

hone

, Hik

ma

Pha

rmac

euti

cals

, Int

u P

rop

erti

es.


These tables show the key results of analysis of the disclosures made by the companies in the FTSE 100

as at 31 December 2016 that were reported in their 2016 accounts.

The figures relate to the worldwide position of each company (not just the UK disclosure) but exclude

healthcare and defined contribution pension arrangements where possible. The source of the data is

each company's annual report and accounts for the accounting period ending in 2016. The surplus/

(deficit) figures are before allowing for deferred tax and before any balance sheet asset limit has been

applied.

Traditionally, some companies with overseas pension schemes do not fund them via an external

scheme, instead backing the pension scheme with company assets, which may result in a larger deficit

being disclosed.

The source of market capitalisation figures is the FTSE All-Share Index Series reports as at the

companies' year-ends (where available).

All figures shown here have been calculated using unrounded numbers. Therefore, some metrics shown

may differ to those calculated using the rounded numbers.

Largest IAS19 liabilities

Company2016

Liabilities £m2015

Liabilities £m

Royal Dutch Shell 72,788 57,723

BT Group 50,350 51,210

Lloyds Banking Group 45,822 36,903

RBS 43,990 35,152

BP 39,689 32,827

Barclays 33,033 28,279

BAE Systems1 32,307 29,236

HSBC Holdings 32,235 25,870

National Grid 25,561 26,180

International Airlines Group 25,056 20,199

Largest IAS19 deficits

Company2016

Deficit £m2015

Deficit £m

Royal Dutch Shell 6,924 2,881

BP 6,719 4,215

BT Group 6,382 7,583

BAE Systems2 6,083 4,522

Tesco 3,175 4,842

Unilever 2,219 1,285

GlaxoSmithKline 2,084 1,584

GKN 1,947 1,482

AstraZeneca 1,529 1,118

TUI Group 1,217 837

Appendix 2 - FTSE 100 accounting risk measures


Largest IAS19 liabilities compared to market capitalisation

Company Liabilities £m Market cap £m

2016Liabilities/

Market cap %

2015Liabilities/

Market cap %

International Airlines Group 25,056 9,349 268 163

BAE Systems1 32,307 18,708 173 185

RBS3 43,990 26,275 167 101

RSA Insurance Group 8,893 5,951 149 164

Sainsbury (J) 7,643 5,273 145 156

Marks & Spencer Group 7,683 6,585 117 92

BT Group 50,350 43,882 115 140

Rolls-Royce Holdings 13,629 12,282 111 111

Lloyds Banking Group 45,822 44,456 103 71

Morrison (WM) Supermarkets 3,764 4,061 93 92

Largest IAS19 deficit compared to market capitalisation

Company Deficit £m Market cap £m

2016Deficit/

Market cap %

2015Deficit/

Market cap %

GKN 1,947 5,684 34 28

BAE Systems2 6,083 18,708 33 29

Tesco 3,175 14,564 22 24

TUI Group 1,217 6,463 19 12

BT Group 6,382 43,882 15 21

Capita 345 3,515 10 2

Dixons Carphone 472 4,864 10 10

Centrica 1,137 12,701 9 1

Sainsbury (J) 408 5,273 8 14

BP 6,719 95,722 7 7

Highest IAS19 funding level

Company Assets £m Liabilities £m

2016Assets/

Liabilities %

2015Assets/

Liabilities %Royal Mail 7,374 3,815 193 204

Standard Life 4,999 3,334 150 153

Old Mutual 772 618 125 125

3i 993 810 123 122

Aviva 20,327 17,347 117 117

Direct Line Insurance Group 103 91 113 118

Land Securities Group 215 190 113 103

Schroders 1,093 975 112 114

RBS 49,229 43,990 112 99

Marks & Spencer Group 8,515 7,683 111 106

Appendix 2 - FTSE 100 accounting risk measurescontinued


Highest employer contributions compared to dividends paid in accounting year5

CompanyContributions

£mDividends

£m

2016Contributions /Dividends %

2015Contributions /Dividends %

RBS 4,786 504 950 255

Anglo American 78 11 700 9

Royal Mail 488 220 222 203

International Airlines Group 734 358 205 420

Smiths Group 269 163 165 49

BT Group 1,106 1,075 103 114

Rolls-Royce Holdings 271 300 90 61

Coca-Cola HBC 13 15 90 13

Sainsbury (J) 207 234 88 26

TUI Group 234 266 88 49

Largest service cost4

Company2016

Service cost £m2015

Service cost £m

Royal Dutch Shell 995 1,214

Royal Mail 694 502

BP 515 696

GlaxoSmithKline 300 271

BAE Systems 288 363

Lloyds Banking Group 277 314

RBS 272 368

BT Group 261 249

HSBC Holdings 255 248

Barclays 243 131

Largest employer contributions

Company2016

Contributions £m2015

Contributions £m

RBS 4,786 1,060

BT Group 1,106 1,054

Royal Dutch Shell 874 848

International Airlines Group 734 499

Barclays 720 689

Tesco 656 576

Lloyds Banking Group 623 427

HSBC Holdings 538 428

Royal Mail 488 409




Largest employer contributions compared to service cost4

CompanyContributions

£mService cost

£m

2016Contributions less service

cost £m

2015Contributions less service

cost £m

RBS 4,786 272 4,514 692

BT Group 1,106 261 845 805

Tesco 656 35 621 -55

International Airlines Group 734 117 617 449

Barclays 720 243 477 820

Lloyds Banking Group 623 277 346 113

National Grid 470 171 299 228

HSBC Holdings 538 255 283 181

Smiths Group 269 1 268 78

Unilever 417 184 233 176

Highest equity allocation

Company2016

Equity allocation %2015

Equity allocation %

Merlin Entertainments 69 68

Ashtead Group 67 70

Tesco 57 62

BP 53 56

Informa 52 42

Next 52 51


Wolseley 48 53

Whitbread 46 51

Experian 45 45

1 The liability figures for BAE Systems include liabilities allocated to equity accounted investments and other participating employers.

2 The deficit figures for BAE Systems exclude £516m of its 2016 deficit (£1,053m in 2015) which is allocated to equity accounted

investments and other participating employers.

3 The market capitalisation for RBS does not include non voting B shares held by the government.

4 The service cost (representing the value of benefits earned over the accounting period) includes the value of any past service benefits

awarded to members during the year.

5 Tesco did not pay a dividend in its 2016 accounting year (2015: £914m) but contributed £656m (2015: £576m) to its pension scheme.

ConvaTec also did not pay a dividend during its 2015 or 2016 accounting years, but contributed £0.4m in 2016 (2015: £0.6m) to its

pension scheme.



We would like to thank those from LCP who have made this report possible:

Alex Waite

Bob Scott

Cat Drummond

Catriona Armstrong

Clive Harrison

David Everett

Dan Osborne

Dane Carter

Dorothy Mendoza

Emma Jenkins

Fern Lai

Fionn Sweeney

Geraint Jones

Gill Hoyle

Jenny Pike

Jeremy Dell

Jessica Horner

Jim Little

Joanne Stewart

Jonathan Griffith

Jordana Shulman

Josh Lenz

Kate Sinclair

Katherine Rumsey

Katie Robson

Kelly Ronaldson

Matt Charman

Nayan Dave

Nick Bunch

Peter Fitchett

Phil Cuddeford

Rebeccah Robinson

Reema Patel

Sailesh Mistry

Sam Tomes

Sarah Lossin

Shaun Wood

Stuart Levy

Tim Marklew


LCP Accounting for Pensions 2016

Bob Scott - Partner

[email protected]

+44 (0)20 7432 6605

Nick Bunch - Partner

[email protected]

+44 (0)20 7432 3090

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