FTSE 100 pension schemes recorded their first year-end accounting surplus since the financial crash in 2007/08, however funding dangers still loom, LCP has reported.

According to LCP’s Accounting for Pensions (AfP) report, the overall accounting position of FTSE 100 schemes grew from 95 per cent to 101 per cent in 2017, converting a £31bn deficit into a £4bn surplus by the year end.

Since the end of 2017, the surplus has improved further, reaching over £20bn by the end of April 2018. This rise in funding levels has been driven by company contributions of £13bn; although 25 per cent lower that the record £17.3bn in 2016, and strong investment growth through the year.

In addition, improvements have been led by changes in schemes’ approach to longevity and discount rate assumptions that countered the impact of worsening financial conditions, LCP confirmed.

Now in its 25th edition, the report also noted that FTSE 100 companies still pay more in shareholder dividends than pension contributions, paying around £80bn in dividends, six times the £13bn paid to pension schemes. Nonetheless, LCP added that the majority of firms have moved to using “increasingly sophisticated” ways to set the IAS 19 discount rate assumption, which has improved FTSE 100 balance sheets by around £15bn.

LCP partner and lead author of the report Phil Cuddeford commented: “For one of the first times in years, FTSE 100 pension schemes have clearly swung into surplus when measured on an accounting basis. Although that’s good news, it is essential that corporate sponsors don’t think they’re out of the woods just yet. History has proven that such accounting surpluses can quickly be wiped out by deteriorating market and economic conditions.

However, Cuddeford emphasised that considerable deficits still remain on trustees’ typical pension scheme funding basis. He added that following on from high-profile collapses including Carillion and BHS, “the gap between dividend payments and scheme contributions is likely to be scrutinised more intensely”.

While this is a positive improvement for FTSE 100 companies, the report also signposts that the new surplus may bring new challenges for some firms. While the impact of changes to the accounting standards IFRIC 14 is not yet known, FTSE 100 companies could find worsened balance sheet positions by around £50bn and over £1bn for some individual companies, LCP noted.

Cuddeford added: “If balance sheet accounting changes go ahead as feared, the FTSE 100 are likely in for a nasty shock. There are some companies which could be exposed to balance sheet hits of well over £1bn, a stark reality not likely to be well received by either markets or shareholders.”

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