We have been analysing company reports with a year-end date of 31 December 2017 in readiness for our forthcoming FTSE 350 DB Pension Scheme Survey 2018. (You can still find last year’s survey on our website.) In an earlier blog post we anticipated that companies would be looking to adopt the latest mortality projection assumptions and, in some cases, change their approach to deriving the discount rate to use for pensions accounting. Both of these expected assumption changes would act to reduce the Defined Benefit Obligation (DBO) disclosed in accounts.
Sure enough our analysis of the 31 December 2017 accounts backs this up. Across the FTSE 350 these assumption changes reduce the aggregated DBO by between 1% to 2%.
We have also seen a large increase in the amount of benefits being paid out by pension schemes – an extra 2% of DBO has been paid out during 2017 compared to what would have been expected at the start of 2017. We expect that this is largely due to pension scheme members exercising their right to transfer their benefits out of DB schemes to access their pension assets flexibly. 2% of DBO may not sound like a lot in percentage terms, but it equates to around £20bn across the FTSE 350. This additional elimination of pension risk being borne by listed UK companies is nearly double the £12bn of liabilities that UK DB pension schemes insured through bulk annuity transactions over the same period.
Therefore we’ve updated the Pension Deficit Index effective 31 December 2017 to allow for these developments. That explains why you’ll see a step change in assets, liabilities and deficit on our charts at that date. Companies reporting at 31 December make up around 70% by value of DB liabilities in the FTSE 350. Much of the remainder is covered by companies with 31 March and 5 April year ends. Over the next few months these accounts will be published and analysed so that we can further update the Pension Deficit Index to reflect again the latest corporate data.