Interactive Investor

Just 19 FTSE 100 companies continue to provide final salary pensions

2nd January 2018 10:23

Edmund Greaves from interactive investor

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Workers increasingly lose out on access to more lucrative final salary defined benefit (DB) pension schemes, new research shows, as employers struggle to meet ongoing costs.

Employee benefit provider JLT found that just 19 companies listed on the FTSE 100 stock exchange continue to provide access to DB pension schemes, based on ongoing DB service costs of more than 5% of the total payroll..

  • Final salary pension schemes must take more risk to avoid shortfalls

According to JLT, businesses are on the whole shying away from DB pension schemes due to soaring costs, ‘onerous’ pension regulations, and challenging economic conditions. The company estimates that ongoing DB pension provision has seen an underlying reduction of 15% in the past year.

Of the 10 FTSE 100 companies with the highest DB pension provision levels, nine have significantly cut back their DB service costs in recent times. Tesco closed its DB scheme to new entrants in 2016, and BP has slashed its pension costs from £699 million in 2016 to £590 million in 2017. BAE Systems and Royal Bank of Scotland are close behind in reducing pension costs.  

Shedding light on the astonishing burden that DB schemes have, JLT says that 11 FTSE 100 companies have total disclosed pension liabilities, which are greater than their equity market value (as of 31 March 2017). In particular, International Airlines Group, BT, and Sainsbury's have total disclosed liabilities worth almost double their equity market value.

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The total disclosed pension liabilities of FTSE 100 companies rose from £584 billion to £705 billion in 2017.

See the table below for the FTSE 100 top 10 companies’ contributions to DB schemes in 2016 and 2017.

Ranking and DB service costs - 2017 Ranking and DB service costs - 2016
Rank Name DB service cost £m (2017) Name DB service cost £m (2016)
1 Royal Dutch Shell 1,127 Royal Dutch Shell 1,172
2 Royal Mail Group 683 BP 699
3 BP 590 Royal Mail Group 694
4 Diageo 390 Tesco 570
5 BAE Systems 277 Diageo 417
6 Royal Bank of Scotland 264 BAE Systems 353
7 Lloyds Banking Group 257 Royal Bank of Scotland 328
8 GlaxoSmithKline 246 GlaxoSmithKline 308
9 Barclays 243 Barclays 303
10 BT 237 Lloyds Banking Group 302

Source: JLT, January 2018.

‘The final demise of DB pension schemes’

Charles Cowling, director of JLT Employee Benefits, comments: “It is sad to see that we are now witnessing the final demise of DB pension schemes in the UK – at least in the private sector. They have simply become too expensive as an employee benefit.

“A typical final salary pension scheme now costs employers more than three times the cost of 30 years’ ago, largely as a result of increased longevity and changing market conditions. A DB pension scheme that might have had an employer cost of 10% to 15% of payroll in the late 1980s now costs the same employer well over 40% of payroll – and that is before any allowance for the costs of paying for large deficits.

  • Pensions auto-enrolment set to include teenagers but ‘huge question’ remains over self-employed

“These costs come up for debate and negotiation at the time of each triennial actuarial valuation. In previous cycles, it has been the smaller schemes that closed the door on future DB benefits for all their members. Now it is the last few massive DB schemes that are closing down. Tesco closed its DB pension scheme in 2016 and Royal Mail is in the process of closing its DB pension scheme. Even the employers for the UK’s largest private sector DB scheme, the Universities Superannuation Scheme, have announced plans to close to all future DB benefits.

“Employees in much poorer defined contribution (DC) schemes will cast a jealous eye on those lucky individuals still enjoying DB benefits, reflecting not only on how many employers have had to channel the large part of their pension spend on propping up expensive DB schemes, leaving little left for their DC schemes, but also reflecting on how an increasingly large part of their taxes is paying for public sector employees to continue to enjoy the expensive luxury of a gold-plated DB scheme.”  

Read more about pensions on Moneywise

This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.

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