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LCP ACCOUNTING FOR PENSIONS 2012
FTSE 100 companies paid over £20 billion into their pension schemes during 2011 yet pension deficits fluctuated daily by up to £10 billion. This report looks at how the UK’s largest companies manage such sizeable pension challenges.
2
For further information about UK issues please contact Bob Scott
or Nick Bunch in our London office. For international issues contact
Shaun Southern, Richard Chini or alternatively 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. The report
is not intended to be an exhaustive analysis of 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. None of the companies have been
contacted to provide additional explanation or further details.
View a full list of our services at www.lcp.uk.com
© Lane Clark & Peacock LLP July 2012
We would like to thank those from LCP who have made this report possible:
Nick Bunch
Rachael Casey
Catherine Chalk
Richard Chini
Laura Davies
Jeremy Dell
Harry Dhaliwal
Catherine Drummond
Beth Dunmall
David Everett
Anika Grant-Braham
Emma Ingham
Holly Moffat
Stuart Levy
Sam Lunn
Tim Marklew
Noreen McGovern
Emily Pegg
Simon Perera
Daniel Potter
David Poynton
Sarah Pryor
Martin Robinson
Rebeccah Robinson
Katie Robson
Bob Scott
Holly Scott
Kate Sinclair
Shaun Southern
Laura Strachan
James Trask
Alex Waite
Rachel Walton
David Wong Min
Charlotte Woods
2
LCP Accounting for Pensions 2012
p4 1. Main findingsp6 1.1 Employers face challenges from
a number of fronts
p6 1.2 Deficits increase with the position
remaining volatile
p7 1.3 Significant contributions already being
paid to remove deficits
p7 1.4 The end of final salary pensions
p8 1.5 Companies still benefiting from the
change to CPI inflation
p9 1.6 Risk reduction measures continue
p10 1.7 Increases in life expectancy assumptions
tailing off
p10 1.8 Overseas schemes of FTSE 100 companies
p12 2. Summary of UK findingsp14 2.1 Introduction
p14 2.2 Increased pressure on companies
p16 2.3 Deficits increase with the position
remaining volatile
p18 2.4 Pension scheme funding
p22 2.5 The end of final salary pensions
p23 2.6 The continuing change to CPI inflation
p25 2.7 Reducing risk in pension schemes
p28 2.8 Life expectancy increasing more slowly?
p30 3. Developments in UK pension provisionp32 3.1 “Defined ambition”, auto-enrolment,
...what next?
p33 3.2 “Red tape challenge”
p33 3.3 The new European Pensions Directive
p35 3.4 Auto-enrolment
p36 4. Accounting standards for pensionsp38 4.1 Reduced profits for most companies
p39 4.2 Removal of “corridor” will hit some
balance sheets
p40 4.3 New disclosure rules
p40 4.4 Other changes
p42 5. LCP’s analysis of FTSE 100 IAS19 disclosures
p44 5.1 Introduction
p44 5.2 Analysis of results
p49 5.3 Key assumptions
p60 6. Non-UK schemes of FTSE 100 companiesp62 6.1 Significance of non-UK arrangements
p64 6.2 Deficit and risk reduction measures
p66 6.3 Consistency of assumptions
p68 6.4 European Pensions Directive
p69 Appendix 1 - FTSE 100 accounting
disclosure listing
p73 Appendix 2 - FTSE 100 accounting
risk measures
3
4
Contentp4 1. Main findingsp6 1.1 Employers face challenges
from a number of fronts
p6 1.2 Deficits increase with the
position remaining volatile
p7 1.3 Significant contributions
already being paid to
remove deficits
p7 1.4 The end of final
salary pensions
p8 1.5 Companies still
benefiting from the
change to CPI inflation
p9 1.6 Risk reduction
measures continue
p10 1.7 Increases in life expectancy
assumptions tailing off
p10 1.8 Overseas schemes of
FTSE 100 companies
Companies face renewed pension challenges as trustees seek to recover ever larger funding deficits and as auto-enrolment draws nearer. Over the next couple of years contributions to FTSE 100 pension schemes could increase by over £5 billion.
Bob Scott
Partner LCP
30
25
20
15
10
5
0
Deficit contributions (defined benefit)
Employer service cost (defined benefit)
Employer defined contribution costs
Employer contributions to pension schemes (£ billion)
2005 2006 2007 2008 2009 2010 2011 Estimate postauto-enrolment
£ b
illio
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LCP Accounting for Pensions 2012
1. Main findings6
1.1 Employers face challenges from a number of fronts � FTSE 100 companies again paid substantial contributions - £21.4 billion -
to their pension schemes in 2011.
� Yet they remain under pressure from trustees, from government and,
potentially, from Europe to contribute ever-increasing amounts to fund
their employees’ and former employees’ pensions.
� Uncertainty in financial markets has seen equity values fall while the
yields on UK government bonds have reached record lows. This has
resulted in trustees calculating higher funding deficits and requiring
increased contributions.
� At the same time the proportion of FTSE 100 pension scheme assets
held in equities has fallen to 35%, just over half of the level in 2001.
Despite this, deficits have still been extremely volatile, with movements
of up to £10 billion in a single day, at points during the last year.
� FTSE 100 companies will also be required to begin “auto-enrolling”
all of their qualifying employees in a pension scheme later this year,
adding to their overall pension costs.
� With no further changes, pension contributions could exceed £26 billion
in 2013 once this requirement takes effect.
� Should the government press ahead with its unwelcome campaign to
force pension schemes to “equalise” Guaranteed Minimum Pensions,
employers will be faced with further costs which, for the FTSE 100,
could amount to several billion pounds.
� In the background, consultation on a new European pensions directive
is ongoing. This could make UK defined benefit schemes subject
to “Solvency II” type reserving, as will shortly apply for insurance
companies. This alone could increase the funding requirements for
FTSE 100 pension schemes by £200 billion.
� It is clear that the present pensions system will not bear such increased
demands on companies’ finances. Therefore, the likelihood is that we
shall see further cutbacks in the level of benefits for future service,
combined with a greater appetite amongst companies for effective
“liability management” exercises.
1.2 Deficits increase with the position remaining volatile � LCP estimates that the combined UK IAS19 net deficit of FTSE 100
companies’ pension schemes was £41 billion at 31 May 2012,
compared to £19 billion at 30 June 2011.
� We estimate that this reflects a total value of liabilities of £447 billion
and total assets of £406 billion.
� Since June 2011, corporate bond yields have fallen by nearly 1% pa on
average and, although expectations of future inflation have also fallen,
these lower yields mean that IAS19 liability values have risen significantly
over the last 11 months.
35%The proportion of assets
held in equities at the
end of 2011.
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7LCP Accounting for Pensions 2012
1. Main findings
� Over the same period, equity markets have fallen and, although bond
holdings have increased in value, the vast majority of schemes do not
hold enough bonds to hedge all of the increase in liability values.
� The position varies significantly for individual companies.
Those invested heavily in equities have seen deficits increase by
more than those invested mostly in corporate or government bonds.
For example, Prudential - which sponsors a scheme with less than
20% of its assets in equities - saw a 21% improvement in funding level
over 2011. However, BP - which holds over two-thirds of pension scheme
assets in equities - saw a 9% fall.
� The increase in the total deficit, £22 billion over the last 11 months,
masks the significant variability of the position on a day to day
basis. For example, on 1 November 2011, a day on which the FTSE 100
index fell by 2.2% and corporate bond yields also fell, we estimate
that the combined FTSE 100 deficit increased by around £10.7 billion.
This illustrates the size of the challenge faced by many companies
in managing their pension liabilities.
� The position remains volatile given the uncertainty surrounding
the Eurozone and the knock on impact that this is having on
financial markets.
� Further detail and analysis can be found in section 2.3.
1.3 Significant contributions already being paid to remove deficits � FTSE 100 companies paid a total of £16.9 billion into their defined
benefit pension schemes during 2011 - almost identical to the amount
that was paid in 2010. Of this, we estimate that over £11 billion went
towards paying off deficits rather than covering additional benefits.
� There is no sign that contributions will fall any time soon. In fact,
since the end of 2011 BT has made a £2 billion payment into one of its
pension schemes in order to accelerate the removal of its deficit. This is
the largest one-off deficit contribution ever made by a company to a UK
pension scheme.
� With many funding valuations being carried out with effective dates at
the end of 2011 and early 2012 - when funding positions were particularly
stretched - the level of deficit contributions may well increase in the next
couple of years.
� Further detail and analysis can be found in section 2.4.
1.4 The end of final salary pensions � The trend for companies to reduce levels of defined benefit pension
provision has continued again this year. Royal Dutch Shell has
announced plans to close its final salary scheme to new employees in
the next year and BAE Systems will be closing its hybrid scheme to new
entrants during 2012.
£2bnThe largest ever deficit
contribution to a UK
pension scheme,
paid by BT in early 2012.
LCP Accounting for Pensions 2012
1. Main findings8
� After allowing for these closures, none of the FTSE 100 companies
covered in this survey will continue to offer a final salary pension to
new employees.
� Eight other companies that had already closed their scheme to new
employees, including Kingfisher and Tate & Lyle, went further and
ceased future accrual for existing members during 2011 or have recently
announced plans to do so.
� Although many companies are offering only defined contribution
schemes for new employees, some companies have retained an element
of defined benefit provision, whilst designing their schemes to mitigate
some of the risks that full-blown final salary schemes bring.
� For example, Tesco has a scheme under which retirement age will
increase to 67, with further increases possible should life expectancy
continue to rise, and Morrisons has set up a new “cash balance” scheme
which provides members with a salary-linked capital sum at retirement.
� Pensions Minister Steve Webb hopes that more companies will follow
the example set by Tesco and Morrisons and establish what he calls
“defined ambition” schemes - thereby enabling some level of defined
benefit provision to continue at an affordable cost.
� Whether companies are prepared to embrace such arrangements will
depend on the legislative framework - under current pensions legislation,
companies that sponsor defined benefit pension schemes of any type
still face significant compliance and regulatory costs.
� Further detail and analysis can be found in section 2.5.
1.5 Companies still benefiting from the change to CPI inflation � On a positive note for employers, companies have continued to disclose
comparatively lower pension obligations due to the change in inflation
measure used to index pensions from the Retail Prices Index (RPI) to the
Consumer Prices Index (CPI).
� By the end of 2011 almost half of the FTSE 100 companies with defined
benefit pension schemes had allowed for a saving from this change.
The £3.5 billion gain disclosed by BT remains by far the largest saving.
� Since the change in inflation measure was announced in mid-2010,
the Office for Budget Responsibility (OBR) has published a report which
suggests that the long-term difference between RPI and CPI
will be larger than previously expected. Many companies that had
already recorded a gain from the change to CPI inflation in their 2010
accounts have reflected a further saving in 2011. For example,
BAE Systems disclosed a £348 million gain from the change to CPI in
its 2010 accounts and has now reflected a further reduction in IAS19
liabilities of around £175 million following an increase in the assumed
gap between RPI and CPI inflation in its 2011 accounts.
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9LCP Accounting for Pensions 2012
1. Main findings
� A wider gap between RPI and CPI would mean even lower pensions for
many pension scheme members than previously expected.
� In light of the potential savings available - and the corresponding
negative impact on members’ benefits - it is perhaps not surprising that
we have seen both companies and member representatives going to
court over this issue.
� In a recent High Court ruling, it was determined that CPI inflation
could be used as the basis for increases to benefits in the QinetiQ
pension scheme as the scheme rules allowed the use of a replacement
inflation index. We expect other companies to investigate the impact
that this ruling has on their pension schemes in the coming months.
� Similarly, we have seen trade unions and pensioner groups, notably from
the British Airways Pension Scheme, seeking to overturn the switch from
RPI to CPI.
� More recently, we have seen suggestions that the Office for National
Statistics (ONS) could be about to review the formulae for calculating
the indices, thereby reducing RPI and bringing it more into line with CPI.
Such a change, if it came through, would benefit those companies with
pension benefits that remain tied to RPI (and further reduce members’
benefits). However, it would also affect the receipts from, and therefore
valuations of, index-linked government bonds, which makes it difficult
to gauge the overall impact on FTSE 100 companies.
� Further detail and analysis can be found in section 2.6.
1.6 Risk reduction measures continue � The move towards lower risk investment strategies continues, with a
marked fall in the proportion of equities held by pension schemes over
2011. For companies with December year-ends, the average proportion
of assets invested in equities fell from 43% at 31 December 2010 to 35%
at 31 December 2011. Aviva made one of the largest changes, reducing
the proportion of equities held by its UK pension schemes from 26%
down to just 7%.
� Companies have also taken steps to remove some of the other risks
posed by their pension schemes. During 2011 International Airlines Group, ITV and Rolls-Royce all entered into “longevity swap” contracts
which are designed to protect them from increases in pension cost as a
result of members living longer than expected.
� Similarly, Smiths purchased a bulk annuity policy which protects it
from investment, inflation and longevity risk for a specific section of its
pension scheme.
� Having recently seen significant increases in the value of government
and corporate bonds, schemes that invest heavily in these asset
classes may find that pricing for bulk annuity policies is
particularly attractive.
LCP Accounting for Pensions 2012
1. Main findings10
� Other risk reduction measures carried out involve the removal of
defined benefit liabilities either through encouraging members to
transfer benefits out of the pension scheme or as a result of pension
increase exchanges.
� Further detail and analysis can be found in section 2.7.
1.7 Increases in life expectancy assumptions tailing off � In recent years we have seen a trend for companies to assume that their
pension scheme members will live longer and longer.
� Average life expectancy assumptions increased again this year, but the
trend may be slowing with five companies - up from three in 2010 -
weakening some aspect of their mortality assumption.
� For example, Next disclosed that its IAS19 liabilities were lower by
£14 million as a result of reducing its longevity assumptions.
� Further detail and analysis can be found in section 2.8 and section 5.
1.8 Overseas schemes of FTSE 100 companies � Overseas pension and other post-retirement liabilities remain significant
for many FTSE 100 companies. We estimate that, under IAS19, FTSE 100
companies have in excess of £100 billion of overseas pension and other
post-retirement liabilities including healthcare.
� As in the UK, a number of FTSE 100 companies have disclosed that steps
have been taken during 2011 to control pension risks and reduce pension
deficits in their overseas schemes.
� Many companies provide healthcare benefits to retired former overseas
employees. FTSE 100 companies valued such liabilities at £14 billion,
of which £9 billion was for US schemes.
� Falling discount rates and changes to mortality tables have acted to
push up IAS19 pension liabilities in many countries.
� Many companies adopt different longevity assumptions for calculating
their IAS19 liabilities overseas from those that they use in the UK.
It is not always clear that such different treatment is justifiable.
� Further detail and analysis can be found in section 6.
Many FTSE 100 companies have already benefited from the change to CPI inflation for compulsory indexation of benefits. Yet a recent court case may have opened the way for even more schemes to adopt CPI as their indexation measure. It is members who pay the price though, with lower eventual benefits.
Bob Scott
Partner LCP
Sec
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adin
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ain
find
ing
s
12
Contentp12 2. Summary of UK findingsp14 2.1 Introduction
p14 2.2 Increased pressure
on companies
p16 2.3 Deficits increase with the
position remaining volatile
p18 2.4 Pension scheme funding
p22 2.5 The end of final
salary pensions
p23 2.6 The continuing change
to CPI inflation
p25 2.7 Reducing risk in
pension schemes
p28 2.8 Life expectancy increasing
more slowly?
Pension scheme liabilities - and deficits - can be substantial. During 2011 ten FTSE 100 companies paid more into their pension schemes than they distributed in dividends to shareholders.
Bob Scott
Partner LCP
Sum
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LCP Accounting for Pensions 2012
2. Summary of UK findings14
2.1 Introduction
This section provides an insight into the disclosure of pension scheme costs in companies’ accounts, comparing the different practices adopted by the largest UK companies and highlighting the financial implications.
By analysing their pension disclosures we aim to measure the exposure
that companies have to their pension liabilities and deficits, particularly in
the context of their market capitalisations, and we identify the steps that
companies are taking to address their pensions issues.
FTSE 100 companies scrutinisedThis report covers 83 of the FTSE 100 companies, analysing annual reports
based on FTSE 100 constituents as at 31 December 2011. 17 companies
were excluded from this report as they did not sponsor a material funded
defined benefit pension scheme. A full list and summary details of the
83 companies’ key pension disclosures are set out in appendix 1.
All the companies analysed have reported under international accounting
standards (IAS19 for pension costs) as required under EU regulations.
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.
2.2 Increased pressure on companiesAs this report goes to print, UK companies are facing an increasing
burden, brought upon them as a result of the pension arrangements
provided to their employees and former employees.
With the Eurozone crisis causing havoc in financial markets, and economic
uncertainty in many other regions, the valuation of pension liabilities
and the value of assets held to meet these pension promises has been
fluctuating wildly. A “flight to quality” has seen investors move money
out of Eurozone countries and higher risk assets such as equities and into
the relative safety of UK government bonds, putting downward pressure
on yields. Within the UK, the Bank of England’s decision to expand its
previous programme of quantitative easing has also served to reduce
government bond yields. Lower yields mean that pension scheme
Sum
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15LCP Accounting for Pensions 2012
2. Summary of UK findings
trustees require a greater level of assets to meet the same liabilities,
resulting in higher deficits, all other things being equal. With the
International Monetary Fund (IMF) recently calling on the Bank of England
to consider a further extension of the quantitative easing programme,
the position may get worse before it gets better.
In April 2012 the Pensions Regulator released its much anticipated
statement on funding pension schemes in the current economic climate.
However, rather than providing any respite this simply confirmed that
it was business as usual for pension scheme funding. Pension scheme
trustees may well have to ask companies for a further increase in
contributions at their next funding valuation.
On top of this, a new European pensions directive threatens to impose
in many cases significantly higher levels of funding and additional
capital requirements, with companies being required to pay even more
contributions to their pension schemes.
Some companies are already finding that the fact that they sponsor
a defined benefit pension scheme is enough to constrain their normal
business activities. A Court of Appeal ruling in October 2011 regarding
the Nortel and Lehman Brothers pension schemes has not helped the
situation. This confirmed that where a financial support direction is issued
by the Pensions Regulator following an insolvency event, the costs of
complying are treated as an administration expense and therefore rank
ahead of payments to creditors. Although issuing a financial support
direction is a lengthy and difficult process, the ruling does effectively give
the Regulator the power to promote the pension scheme deficit above any
other debt owed by the employer. In some cases, companies have found
that this has affected their ability to borrow or refinance existing debt.
Even companies that don’t provide any defined benefit pensions will
shortly have to face the additional cost and administrative burden of the
government’s requirement to automatically enrol all qualifying employees
into a pension scheme that meets minimum quality standards.
LCP Accounting for Pensions 2012
2. Summary of UK findings16
2.3 Deficits increase with the position remaining volatileWe estimate that the combined FTSE 100 pension deficit in respect of UK
liabilities was £41 billion at the end of May 2012, reflecting a total liability
value of £447 billion and total assets of £406 billion.
The chart below shows how the position 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. A separate
analysis of overseas arrangements is included in section 6.
The increase on the deficit figure of £19 billion at 30 June 2011, as reported
last year, is due primarily to a continued fall in corporate bond yields,
which has resulted in an increase in reported IAS19 liability values.
To some extent the increase in the deficit has been moderated by the
significant contributions that companies continue to pay into their
pension schemes and by a rise in asset values.
However, the position has varied significantly for individual companies,
with pension schemes invested heavily in equities seeing more of a
deterioration in funding level than those invested mostly in corporate
or government bonds.
Prudential and Rolls-Royce - which sponsor schemes with less than 20%
of their assets in equities - saw funding levels increase by 21% and 13%
respectively during 2011. In contrast, the pension schemes of BP and
Estimated IAS19 position for UK schemes of FTSE 100 companies
-100
-80
-60
-40
-20
0
20
Jun
20
07
De
c 2
00
7
Jun
20
08
De
c 2
00
8
Jun
20
09
De
c 2
00
9
Jun
20
10
De
c 2
010
Jun
20
11
De
c 2
011
£ b
illio
n
£41bnThe aggregate FTSE 100
pension deficit as at
31 May 2012 stood at
£41 billion, compared
with £19 billion at the
end of June 2011.
Sum
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17LCP Accounting for Pensions 2012
2. Summary of UK findings
Capita hold over two-thirds of their assets in equities or similar assets and
both saw a reduction of 9% in their funding level.
At certain times during the last year the position was extremely
volatile with total deficits for FTSE 100 companies moving by as
much as £10 billion in a single day. Some examples are set out below.
With uncertainty surrounding the future of the Eurozone, financial markets
remain unsettled. Pension scheme deficits therefore remain volatile.
The table below shows how the position could develop from the end
of May 2012 (when corporate bond yields were about 4.5% pa and the
FTSE 100 was around 5,320).
Bond yieldsUnder IAS19, liabilities are measured by reference to yields on high quality
corporate bonds. There was a steady decrease in yields over 2011 and into
2012 which has resulted in an increase in IAS19 liability values.
At 31 May 2012 the yield on the iBoxx over 15 year AA-rated corporate
bond index was 4.22% pa - the lowest level since corporate bond yields
were first used for measuring accounting liabilities.
The graph overleaf shows how corporate bond yields have varied over
recent years.
DateEstimated change in total deficits
Main reasons for change
10 October 2011 £9.0 billion reduction1.8% rise in equity markets;
0.11% pa rise in AA bond yields
31 October 2011 £8.9 billion increase2.8% fall in equity markets;
0.16% pa fall in AA bond yields
1 November 2011 £10.7 billion increase2.2% fall in equity markets;
0.21% pa fall in AA bond yields
Corporate bond yields
Level of FTSE 100 4.0% pa 4.5% pa 5.0% pa
4,820 £94 billion deficit £54 billion deficit £18 billion deficit
5,320 £81 billion deficit £41 billion deficit £6 billion deficit
5,820 £68 billion deficit £29 billion deficit £7 billion surplus
LCP Accounting for Pensions 2012
2. Summary of UK findings18
The difference between the peak of 7.72% pa in October 2008, just after
the collapse of Lehman Brothers, and present levels, is highly significant in
terms of IAS19 liability values. All else being equal, the fall in bond yields
since late 2008 represents an increase in IAS19 liability value of around 75%.
2.4 Pension scheme fundingCompanies have continued to pay significant contributions to their
pension schemes. Including contributions to both defined benefit and
defined contribution schemes, the total amount paid by companies during
2011 was £21.4 billion, slightly up on the £21.1 billion paid in 2010.
Contributions to defined benefit schemes totalled £16.9 billion, of which
we estimate £11.1 billion - almost two thirds - went towards removing
deficits rather than additional benefit accrual for current employees.
The highest level of contributions during the year was £2.2 billion
paid by Barclays. This included deficit contributions of £1.8 billion in
December 2011, which form part of the recovery plan put in place following
the September 2010 valuation of the bank’s main pension scheme.
Three other companies paid more than £1 billion into their defined benefit
pension schemes during 2011. These were Royal Dutch Shell (£1.4 billion),
BT (£1.3 billion) and Royal Bank of Scotland (£1.1 billion).
Ten companies - BAE Systems, Barclays, BT, International Airlines Group,
ITV, Lloyds Banking Group, Marks & Spencer, Royal Bank of Scotland,
Serco and Wolseley - paid more to their pension schemes than they paid
in dividends to shareholders.
iBoxx over 15 year AA rated corporate bond yields
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11
No
min
al a
nn
ual
yie
ld (
% p
a)
Source: Markit iBoxx
3.5% paBy the end of May 2012
corporate bond yields had
fallen by 3.5% pa from their
peak in late 2008.
Sum
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19LCP Accounting for Pensions 2012
2. Summary of UK findings
The chart below shows how company payments into pension schemes
have changed since 2005 and how they might increase in future.
30
25
20
15
10
5
0
Deficit contributions (defined benefit)
Employer service cost (defined benefit)
Employer defined contribution costs
Employer contributions to pension schemes (£ billion)
2005 2006 2007 2008 2009 2010 2011 Estimate postauto-enrolment
£ b
illio
n
There is no sign that contributions will fall any time soon. In fact, since the
end of 2011, BT has made a deficit contribution of £2 billion - this tops the
£1.8 billion paid by Barclays as the largest ever one-off deficit payment to
a UK pension scheme.
In general, contributions to defined benefit pension schemes are set every
three years. Whilst in some cases the contributions agreed at the last
funding valuation will continue to be sufficient to meet current deficits,
with many valuations being carried out at the end of 2011 and early 2012
- when funding positions were particularly stretched - we may still see
another step increase in the deficit contributions being paid by companies
to their pension schemes.
We also expect to see a significant increase in the contributions made
by companies to defined contribution schemes, as the requirement
to automatically enrol qualifying employees into a pension scheme
begins to come into force later this year. We have shown in the chart
above an indication of the level of contributions that companies would
need to pay once auto-enrolment takes effect, on the assumption
that they make no changes to their existing pension arrangements
so that auto-enrolment costs are additional. We have also allowed for
a rise in deficit contributions commensurate with recent changes in
deficits. It seems likely that, faced with such increased costs,
companies will decide to modify their existing schemes to provide
lower benefits or contributions.
Further detail on auto-enrolment is set out in section 3.
£26bnThe estimated level of annual
contributions to FTSE 100
pension schemes following
auto-enrolment.
LCP Accounting for Pensions 2012
2. Summary of UK findings20
Alternatives to cash fundingAs well as paying large contributions into their pension schemes,
FTSE 100 companies continue to make use of alternative forms of funding.
BAT, Experian, Legal & General, Reckitt Benckiser, Rio Tinto, Scottish & Southern Energy, Smith & Nephew and Standard Life all disclosed
having company guarantees in place for some or all of their defined
benefit schemes. Where suitably structured, cross-company guarantees
can also help to reduce the annual levy payable by the pension scheme
to the Pension Protection Fund (PPF). In some cases these levies can be
significant - International Airlines Group disclosed that costs in relation to
PPF levies were €9 million during 2011.
AstraZeneca, BAE Systems, Diageo, International Airlines Group, Man,
Rexam and Smiths all disclosed having paid additional contributions to
an escrow account or separate trust that would become payable to the
pension scheme on the occurrence of certain events, such as insolvency
of one or more of the participating employers.
Other companies have provided similar security by granting their pension
scheme a charge over certain assets:
� Centrica disclosed that its pension schemes have been granted a charge
over the Humber power station.
� InterContinental Hotels Group has provided a charge over one hotel,
valued at $85 million, to its pension scheme.
� International Airlines Group disclosed that its pension schemes
have access to letters of credit totalling €275 million which are secured
on aircraft.
� The Rexam pension scheme has a charge over canning facilities and
machinery, enforceable before 1 January 2013 in the event of a default on
contributions to the scheme or a material decline in the strength of the
employer’s covenant.
� Vodafone has provided a charge in favour of the trustee of its pension
scheme over UK index-linked government bonds held by the company.
We continue to see new funding arrangements emerging, with United Utilities entering into an inflation mechanism with its pension scheme.
Under this mechanism additional contributions will be paid in periods
where inflation exceeds 2.75% pa. This appears particularly appropriate
given that the company has a natural hedge against inflation through its
regulated pricing structure.
We have also seen companies agreeing to pay additional pension
contributions that are dependent on the performance or activities of
the business:
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21LCP Accounting for Pensions 2012
2. Summary of UK findings
� BT has agreed that one third of any net proceeds from disposals
and acquisitions in excess of £1 billion during any 12-month period
will be paid into its pension scheme. In addition, BT had promised
that contributions to the pension scheme would be at least as large
as payments made to shareholders over the three years to
31 December 2011.
� InterContinental Hotels Group has agreed that 7.5% of the net proceeds
of any hotel disposals will be paid into the pension scheme with
additional payments dependent on the growth in the group’s earnings
above specified targets.
� Invensys has said that at least 8% of the proceeds of any business sale
exceeding £1 million will be paid into the pension scheme.
� Whitbread has promised that the pension scheme will participate in any
increases in ordinary dividends in excess of RPI and will have the right to
consultation before any special distribution can be made.
Last year we reported in detail on the partnership arrangements that
some companies have recently set up with their pension scheme trustees.
Typically, these work as follows:
1. Assets of the company are transferred into a newly created
partnership. Usually property is transferred, although Diageo has
instead transferred stocks of whisky into a partnership with its
pension scheme trustees and GKN has sold the licence over its
trademark and royalty rights to its pensions partnership.
2. The company makes a one-off contribution to the pension scheme,
which is then invested in the partnership in return for the pension
scheme having the right to income generated by the partnership
assets. In some cases, the right to receive this income may be
contingent on other events - for example, the level of dividends
paid by the company.
3. The partnership is structured so that its assets would transfer into
the pension scheme on the sponsoring employer’s insolvency.
4. After a specified period the assets in the partnership revert to the
company, possibly with a further contingent payment from the
partnership to the pension scheme to ensure that the scheme is
fully funded.
For the pension scheme this arrangement provides a regular income and
additional security against the sponsoring employer’s insolvency.
For the employer, this type of arrangement has even more advantages:
� There is no requirement for an up-front cash contribution, yet the
pension scheme can place a value on the future income stream
generated by the partnership assets.
� It has in the past been possible to receive accelerated tax relief on the
expected future payments to the pension scheme from the partnership.
LCP Accounting for Pensions 2012
2. Summary of UK findings22
� The period over which the scheme’s deficit is removed can be longer
than would normally be acceptable for direct cash contributions.
� The arrangement can be structured to avoid the risk of a
trapped surplus.
� It may be possible to secure a reduction in the scheme’s PPF levy.
ITV, Kingfisher, Sainsbury’s, Tesco and Whitbread all extended their
existing pension partnerships through additional investment during 2011.
IMI, Lloyds Banking Group and Marks & Spencer also utilise partnership
arrangements but did not report extending them during the year.
In March 2012 HMRC introduced new legislation which limits the
circumstances in which up-front tax relief can be given to the companies
which fund these partnership arrangements. It remains to be seen
whether this will limit further use of these arrangements in the future.
The complexities of pensions legislation mean that companies can find
themselves with unexpected liabilities. Carnival reports that a 2011 court
order determined that it continues to retain a link to the British Merchant
Navy Ratings Pension Fund, a pension scheme that the company had
withdrawn from in 1999. As a result, Carnival estimates that it will be
required to make further contributions of $18 million to this scheme and
has made provision for this in its 2011 accounts.
Going further, in January 2012 the Pensions Regulator issued a financial
support direction requiring ITV to provide support for the Boxclever
pension scheme. ITV had previously received cash proceeds of around
£500 million from transactions involving Boxclever, prior to its insolvency
in 2003. However, with the decision being appealed, this case is likely to
run on for some time before any firm conclusion is reached.
2.5 The end of final salary pensionsThe trend for companies to reduce levels of defined benefit pension
provision has continued.
Royal Dutch Shell has announced plans to close its final salary scheme
to new employees in the next year and BAE Systems will be closing its
hybrid scheme - which provides a combination of final salary and defined
contribution benefits - to new entrants during 2012. Following these
closures, none of the FTSE 100 companies covered in this report will
continue to offer a final salary pension to new employees.
Aviva, G4S, Man, Schroders and Tate & Lyle all closed their defined
benefit pension schemes to future accrual for existing members during
2011. Whilst G4S and Man have retained a link to final salary for accrued
benefits, the other three companies have reflected a gain in their accounts
due to the lower level of deferred revaluation that will now apply in future
on benefits that have already built up.
0The number of FTSE 100
companies providing a final
salary pension scheme to
new employees.
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2. Summary of UK findings
Kingfisher and Severn Trent have both announced plans to close their
pension schemes to future accrual in 2012. InterContinental Hotels Group
will be closing to accrual from 1 July 2012, and as a result recorded a
$28 million gain in its 2011 accounts.
Whilst not ceasing all defined benefit accrual, existing Unilever employees
will move from a final salary scheme to a career average revalued earnings
(CARE) basis with effect from July 2012.
A common change in recent years has been to impose a cap on future
increases to pensionable pay. However, Centrica was the only company
reporting such a change this year, with increases being restricted to
a maximum of 2% pa from 2012. As a result, Centrica disclosed a
£333 million reduction in pension liabilities in its 2011 accounts.
Lloyds Banking Group had already introduced a cap of 2% pa on increases
in pensionable pay but now reports that it faces a legal challenge from
scheme members over this change.
More fundamental pension changes are proposed by Morrisons,
which will be setting up a new “cash balance” scheme for all employees in
the next year. Under a cash balance scheme members accrue entitlement
at retirement to a monetary amount based on final salary and service,
which they then use to purchase an annuity with an insurance company.
This new scheme has been commended by the Pensions Minister,
Steve Webb, as meeting his vision for a “defined ambition” pension
scheme, which shares risk more evenly between employers and
employees than existing pension schemes. In the case of a cash
balance scheme pre-retirement investment risk is met by the employer;
the employee takes on post-retirement risks, through the uncertain terms
on which an annuity may be purchased at retirement.
Another significant change is being made by Tesco, where retirement
age will shortly increase from 65 to 67, with further increases possible if
life expectancy continues to rise. At present retirement ages above 65 in
occupational pension schemes are very rare. Again, this change has been
highlighted by the Pensions Minister as enabling defined benefit provision
to continue at an affordable cost.
2.6 The continuing change to CPI inflationIn last year’s report we commented on the initial fallout from the
government’s announcement in July 2010 that the inflation measure
applying for statutory increases to benefits from occupational pension
schemes would change from the Retail Prices Index (RPI) to the Consumer
Prices Index (CPI).
LCP Accounting for Pensions 2012
2. Summary of UK findings24
As companies have now had time to consider the impact of this change on
the benefits provided by their schemes, we are seeing an increasing number
of gains being disclosed as a result. By the end of 2011 around half of the
FTSE 100 companies with defined benefit pension schemes had shown a
saving due to this change. The £3.5 billion gain disclosed by BT in its
March 2011 accounts remains by far the largest. Of the companies reporting
at the end of 2011, HSBC disclosed the largest gain - $587 million.
It is perhaps surprising that more companies have not disclosed a change
in inflation measure in their 2011 accounts. We are unable to tell whether
this is simply because no change to CPI indexation applies in their pension
schemes, or because for their schemes, the position remains uncertain.
In the last year we have seen several legal challenges for and against the
switch to CPI inflation. In November 2010, a collection of trade unions
argued against the validity of the government’s change to CPI inflation in
public sector schemes, but this was rejected by the High Court with the
decision subsequently upheld following appeal.
In the private sector, former trustee Mike Post has been one of the
most vocal opponents to the change to CPI, having led the challenge to
maintain RPI inflation in the British Airways pension schemes (part of
International Airlines Group since February 2011). However, with pension
increases having already been granted based on CPI, it seems unlikely that
there will be any change back to RPI inflation.
A High Court case in February 2012 may have opened the doors for more
schemes to adopt a change in the inflation measure they use. In this
case, regarding the QinetiQ pension scheme, it was determined that CPI
inflation could be used as the basis for increases to benefits - including
those that members had already built up - as the scheme rules allowed
the use of a replacement inflation index. As many schemes have similar
wording in their rules, the implications of this case could be far reaching.
Since the change in inflation measure was announced in 2010, the Office
for Budget Responsibility (OBR) has published a report which suggests
that the long-term difference between RPI and CPI is likely to be larger
than originally anticipated. We have seen evidence of this in the gap
between the CPI and RPI assumptions adopted this year, with many
companies that had already recorded a gain from the change to CPI
inflation in their 2010 accounts reflecting a further saving in 2011.
For example, BAE Systems disclosed a £348 million gain from the change
to CPI in its 2010 accounts and has now reflected an additional reduction
of around £175 million in IAS19 liabilities following an increase in the
assumed gap between RPI and CPI inflation in its 2011 accounts.
50%Around half of FTSE 100
companies allowed for a
change to CPI inflation in
their 2011 accounts.
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The widening gap between RPI and CPI worsens the position for many
pension scheme members, who will now receive even lower benefits than
they had previously been led to expect.
Changes to RPI as well?In a further twist to the uncertainty regarding inflation measures there has
recently been speculation that the method of calculating RPI could be
changed to bring it more in line with the CPI inflation formula. This follows
work carried out by the Consumer Prices Advisory Committee and related
bodies at the ONS to look at whether the mathematical formula underlying
the RPI calculation should be brought into line with that applying under
the CPI calculation. As the “formula effect” accounts for the majority of
the expected long-term gap between RPI and CPI, a change could result in
a decrease in future RPI inflation.
In mid-June the ONS released a consultation document on this issue.
In this it states that it has the explicit aim of understanding, explaining and
eliminating any unjustifiable and unnecessary gap between the measures.
A change to RPI, if it came through, would benefit those companies with
pension benefits that remain tied to this inflation measure (and further
reduce members’ benefits). However, it would also affect the receipts
from, and therefore valuations of, index-linked government bonds, which
makes it difficult to gauge the overall financial impact on FTSE 100
companies.
2.7 Reducing risk in pension schemesDuring 2011 we have seen a marked decrease in the proportion of assets
that FTSE 100 pension schemes hold in equities. The graphs below show
the splits at the start and end of 2011 for companies that have December
reporting dates - for these schemes the average proportion of assets held
in equities fell from 42.5% to 34.8% over the year. Non-UK schemes have
been excluded where possible.
December 2011
Equities34.8%
Bonds45.7%
Other19.5%
December 2010
Equities42.5%
Bonds40.6%
Other16.9%
LCP Accounting for Pensions 2012
2. Summary of UK findings26
As bonds outperformed equities during 2011 part of the reduction in equity
holdings reflects market movements, rather than any active reworking of
investment strategies. However, regardless of the reason for the change,
FTSE 100 pension schemes had significantly less risk in their investment
strategies at the end of 2011 than was the case at the end of 2010.
Several companies do appear to have taken active steps to reduce the
level of equities held. For example, BG Group reduced the proportion held
in equities from 76% to 60% and Aviva reduced the proportion of equities
in its UK pension schemes from 26% to just 7% at the end of 2011.
There were very few companies that reported an increase in the allocation
to equities. Of those that did, Carnival disclosed the largest change -
a 10% increase in equity allocation, up from 34% to 44%.
Whilst moving assets from equities to bonds reduces investment risk,
companies can still be left with other significant risks in their pension
scheme. Most notable is longevity - the risk that pension scheme
members live longer than expected and the cost of providing their
pensions increases. During 2011 International Airlines Group, ITV and
Rolls-Royce all took steps to remove this risk by entering into a
“longevity swap” with an insurance company or bank. Under this type
of arrangement, the counterparty provides additional payments to the
pension scheme if members live longer than assumed.
In order to transfer all pensions risk to a third party, companies can
purchase a bulk annuity policy with an insurance company (a “buy-in”
or “buy-out”) - something that a number of FTSE 100 companies have
done since the market for this business took off at the start of 2007.
During 2011 Smiths purchased a buy-in policy which removed the
longevity, investment and inflation risk for £147 million of pensioner
liabilities. Legal & General and Resolution also purchased pensioner
buy-in policies during 2011, which added to the existing policies already
held by their pension schemes, and covered new groups of pensioners.
Although the cost of buying out the benefits for all members is currently
too high for most companies to consider, buy-in policies covering just
pensioners can offer good value when compared to the IAS19 accounting
liability or the technical provisions required by the scheme’s trustees.
This is illustrated in the chart opposite. Schemes that invest heavily in
government or corporate bonds may find these policies attractive given
the large rise in value of these asset classes over the last year.
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2. Summary of UK findings
“Liability management” exercises are another way in which companies
can reduce pensions risk through the removal of benefits from the
pension scheme.
There are two main types of exercise:
1. Enhanced transfer value exercises, under which deferred members are
offered an enhancement to the value of their benefits, or some other
inducement, such as a separate cash payment, if they transfer their
benefits out of the pension scheme.
2. Pension increase exchanges, whereby pensioners are offered a higher
current level of pension in return for agreeing to waive their rights to
some or all of the future increases on their pension.
GKN, IMI and Man all carried out enhanced transfer value exercises during
2011. It appears that these were effective in reducing liabilities - and
pensions risk - with Man reporting that 36% of the scheme’s deferred
members took up the offer of an enhanced transfer value, removing
£29 million of IAS19 liabilities from the pension scheme. IMI has also
offered pensioners the option of exchanging future increases on their
pensions in return for a higher level of pension from the start of 2012.
When structured carefully, exercises such as these can be beneficial
to companies in reducing their exposure to pensions risk and can also
offer pension scheme members an option that many value highly.
Source: LCP research
Dec2007
Jun2008
Dec2008
Jun2009
Dec2009
Jun2010
Dec2010
Jun2011
Dec2011
70
80
90
100
110
120
130
140
Pen
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liab
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Buy-in price
Technical provisionsCompany accounting liability
Divergence in pricing
Lehman Brothers’ insolvency
Convergencein pricing
Pensioner buy-in pricing
LCP Accounting for Pensions 2012
2. Summary of UK findings28
However, some liability management exercises have been criticised for
offering poor value for money or for unfairly inducing members to give
up valuable benefits.
In October 2011 the Pensions Minister announced that the government
would act to root out bad practices in this area. The first step is an
FSA consultation released at the end of February 2012, which is likely
to make it harder for financial advisers to recommend that members of
defined benefit pension schemes transfer their pensions elsewhere.
More recently, in June 2012, a new code of practice has been published.
This was developed by an industry working group and relates to companies
who undertake these types of exercise. The code strongly discourages cash
incentives in relation to enhanced transfer exercises and sets guidelines
for the provision of detailed information or, in some cases, advice, where
employees are offered the opportunity to give up future pension increases.
2.8 Life expectancy increasing more slowly?Once again most companies assumed longer life expectancy in their 2011
accounts than in 2010. Across the FTSE 100, a 65 year old man is now
assumed to live past age 87. This continues the trend seen since the
current accounting standard was introduced in 2005, with the change in
average assumption for a man aged 65 shown in the chart below.
However, the rate of increase has slowed from the very rapid increases in
assumed life expectancy seen from 2006. In fact, in 2010 three companies
reduced their assumption about how long members would live and this
year five have done so.
Next revealed that the modified mortality assumption used for its
2011 accounts reduced the value of IAS19 liabilities by £14 million.
CRH, Kingfisher, Morrisons and Pearson were the other companies
that disclosed shorter life expectancy for at least some members of
their UK schemes.
88
87
86
85
84
83
Life expectancy for a male aged 65
2005 2006 2007 2008 2009 2010 2011
Exp
ecte
d a
ge
at d
eath
FTSE 100 companies reduced their equity holdings to just 35% of pension scheme assets by 31 December 2011, the lowest level for more than a generation.
As well as reducing investment risk, 2011 saw companies seeking to remove other risks by taking out longevity swap contracts or completing a “buy-in” of pensioner liabilities.
Bob Scott
Partner LCP
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Contentp30 3. Developments in UK
pension provisionp32 3.1 “ Defined ambition”,
auto-enrolment,
...what next?
p33 3.2 “Red tape challenge”
p33 3.3 The new European
Pensions Directive
p35 3.4 Auto-enrolment
The Government says it wants employers to provide decent pensions. Yet the current regulatory, tax and compliance regime puts significant hurdles in the way of companies who offer defined benefit pensions. And, as we look to the future, we see auto-enrolment bringing huge administrative challenges to most companies; European legislation threatening to require insurance-style reserving; and the DWP pushing schemes to incur disproportionate costs to “equalise” GMPs.
Bob Scott
Partner LCP
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LCP Accounting for Pensions 2012
3. Developments in UK pension provision32
The pace of change in UK pension provision shows no sign of slowing.
During 2011, companies continued to seek ways to “de-risk” their pension
schemes and to reduce their overall pension liabilities. The change from
RPI to CPI provided some respite for employers with defined benefit
pension schemes and, in the early part of 2011, as asset values rose,
a number of companies could contemplate a future with their schemes
either “self-sufficient” or bought out with an insurance company.
Funding pressuresThe latter half of 2011 saw considerable turmoil in financial markets with
global equity markets falling, the future of the Euro in question, and a
“flight to quality” as many investors moved money into UK government
bonds. Within the UK, the Bank of England continued its programme
of quantitative easing in an attempt to stimulate economic activity.
The result was that by the end of 2011, as gilt yields had fallen to record
lows, funding deficits had increased significantly and sponsors of defined
benefit pension schemes faced renewed demands from trustees for
increased funding.
Against this background, the Pensions Regulator has issued the first in
a series of annual statements on scheme funding in which it offered no
direct respite to employers with pension scheme valuations at the end
of 2011 but instead emphasised the “flexibility” within the scheme
funding framework.
A key part of the Regulator’s statement was an indication that schemes
should build on existing recovery plans, with contributions at least
maintained in real terms. Accordingly, we are unlikely to see any overall
reduction in deficit contributions for FTSE 100 companies for the
foreseeable future. Many companies may increase their contributions or,
like BT, pay large one-off contributions when their cashflow position allows.
3.1 “Defined ambition”, auto-enrolment, …what next?The Pensions Minister has talked enthusiastically of “defined ambition”
(DA) pension schemes. These would provide more certainty to members
than a straight defined contribution arrangement but would be less
onerous for employers than full defined benefit schemes.
Whilst the Minister’s support for such arrangements is to be welcomed,
there must be some doubt as to whether he can deliver the necessary
legislative framework and, even if he could, whether companies would
embrace DA schemes. To date, there have only been a few examples -
Tesco and Morrisons are both mentioned in this connection - that have
implemented such schemes but, for most, defined contribution remains
the preferred route.
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33LCP Accounting for Pensions 2012
3. Developments in UK pension provision
Indeed, whilst the forthcoming auto-enrolment requirements are set to
increase significantly the number of individuals building up some form of
work-based pension provision, many employers are likely to provide only
the minimum level of required contributions and only a very small minority
are expected to auto-enrol their employees into a defined benefit or
DA pension scheme.
Therefore, it is unlikely that auto-enrolment on its own will solve the
growing problem of insufficient pension provision at retirement.
3.2 “Red tape challenge”The DWP has also announced a “red tape challenge” in which layers
of unnecessary regulation are to be removed. Sadly, this seems likely
to go the way of most civil service initiatives to reduce bureaucracy,
particularly as both contracting-out and auto-enrolment legislation are
to be excluded and, we are told, there must be no “winners and losers”.
Indeed, the DWP issued a separate consultation on “equalising”
Guaranteed Minimum Pensions (GMPs). These are a relic from 1997
and the rules surrounding their calculation and payment are already
bewilderingly confusing and complex. To attempt to “equalise” GMPs
(which are only unequal as they are a substitute for unequal State
benefits) would be expensive to implement, complex to administer and
would provide relatively small adjustments to members’ benefits.
In our view such an exercise clearly contradicts both the Pensions
Minister’s desire to encourage employers to provide better pensions and
the “red tape challenge”.
3.3 The new European Pensions DirectiveThe move away from defined benefit pension provision looks set to
continue with a new European pensions directive likely to significantly
increase the burden on employers who sponsor a defined benefit
pension scheme.
Consultation on the directive commenced in late 2011. The stated intention
is to achieve convergence of the insurance and pension regimes and
greater harmonisation of pension supervision across European states.
Although there is still some way to go until any proposals are finalised,
and we have recently learned of a further delay to the process, the
changes being suggested could result in significantly higher funding
targets for defined benefit pension schemes as well as a substantial
increase in reporting, disclosure and governance requirements.
LCP Accounting for Pensions 2012
3. Developments in UK pension provision34
One of the key proposals is that every funded pension scheme will be
required to produce a “holistic” balance sheet. This would set out a
valuation of the scheme’s assets covering:
� financial assets eg invested assets (at market value);
� financial contingent assets eg any security over other assets; and
� sponsor covenant and pension protection schemes. This would include
future recovery plans, perhaps a formal valuation of covenant strength
and, potentially, a value placed on the reliance on the PPF.
These assets would then be compared to a “risk free” valuation
of liabilities, with additional allowance for risk buffers and capital
requirements. This is similar to the liability valuations that will shortly
apply for insurance companies under the long delayed Solvency II,
with different tiers of assets required to cover the various elements
of the liability valuation.
An example of what this might look like for the pension schemes of the
FTSE 100 as a whole is shown below.
If pension schemes were required to adopt the Solvency II type reserving
that will shortly apply for insurance companies, then we estimate that the
funding requirements for FTSE 100 companies could increase by up to
£200 billion.
At least initially, the introduction of a new pensions directive would not
impact IAS19. However, with the general direction of travel being towards
measurement of pension liabilities on a “risk free” basis, accounting
valuations of pension liabilities could yet increase significantly.
Assets Liabilities
Sponsor covenant and pension protection schemes
Financial contingent assets
Financial assets
Excess of assets over liabilities
Risk bu�er
Risk free valuationof liabilities
£200bnThe possible increase in
funding requirements for
FTSE 100 companies under
the proposed European
pensions directive.
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3. Developments in UK pension provision
3.4 Auto-enrolmentAs noted above, from October this year larger employers will start
to be required to enrol all qualifying employees automatically into
a pension scheme that meets certain minimum quality standards.
Eventually, by 2017, all employers will be required to comply.
Once the arrangements are fully in place, the broad requirement will
be for contributions of 8% of qualifying earnings - including a minimum
employer contribution of 3% - to be paid into a defined contribution
pension scheme for all qualifying employees, unless they actively choose
to opt out of the system. Alternatively, companies can automatically
enrol employees into a suitable defined benefit or hybrid pension
scheme. Those that do will have the option to defer until October 2017.
The “big four” supermarkets will be the first companies required to
implement auto-enrolment from 1 October 2012. Morrisons and Tesco
have indicated that they plan to use their existing pension schemes
(following the changes set out in section 2.5) for auto-enrolment from
this date. Sainsbury’s and Asda are expected to auto-enrol employees
into defined contribution schemes.
36
Contentp36 4. Accounting standards
for pensionsp38 4.1 Reduced profits for
most companies
p39 4.2 Removal of “corridor”
will hit some
balance sheets
p40 4.3 New disclosure rules
p40 4.4 Other changes
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New accounting rules will mean fewer options for companies reporting after 2013, lower profits for many and, possibly, more focused and appropriate pensions disclosures.
Nick Bunch
Partner LCP
LCP Accounting for Pensions 2012
4. Accounting standards for pensions38
New rules on accounting for pensions are fast approaching, with a revised
version of the international pensions accounting standard IAS19 to come
into force next year.
The impact will vary greatly from company to company - most will see a
hit to profits although some others will see their profits improve, and a
few will see their balance sheets damaged. All will need to include extra
information on their pension risk in their accounts.
Under the new standard companies’ 2013 accounts will also need to
show the 2012 figures recalculated under the new rules. We estimate
that FTSE 100 companies’ 2012 profits will be over £2 billion lower when
recalculated under the new standard but with the impact unevenly spread
among companies. This will affect comparisons between companies under
commonly used measures such as earnings per share.
4.1 Reduced profits for most companiesAt present, companies estimate at the start of each year the rate of
return they expect to earn on their pension scheme assets over the year.
This amount is then credited to profit.
In future, the credit to profit will be calculated using the IAS19 discount
rate, which is based on the yields on AA-rated corporate bonds and is
usually lower than the return that might be expected from a balanced
portfolio of equities, bonds and other assets. Therefore, the credit to
profit will be lower for most companies. This is illustrated in the graph
below, with each bar showing the estimated change in 2011 profits caused
by this change for an individual company.
Estimated impact of removal of expected return on assets on 2011 profits
100
0
-100
-200
-300
-400
-500
BT
BP
Royal Dutch Shell
Aviva
Rolls-Royce
£ m
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£2bnWe estimate that profits for
FTSE 100 companies in 2012
will be over £2 billion lower
when recalculated using the
new accounting standard.
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39LCP Accounting for Pensions 2012
4. Accounting standards for pensions
However, some companies that sponsor pension schemes with conservative
investment strategies will see higher profits under the new standard.
For example, Aviva now has less than 10% of pension scheme assets invested
in equities. We estimate that under the new rules profits would have been
around £70 million higher in 2011 and with the lower allocation to equities
applying at the end of 2011, would be £180 million higher in 2012.
4.2 Removal of “corridor” will hit some balance sheetsUnder the current IAS19 standard companies have the choice of dealing
with “unexpected” gains and losses, such as those caused by movements
in the stock market, in two ways:
� Recognise all gains and losses immediately outside of profit and loss.
� Recognise only actuarial gains and losses that exceed a specified level
(often called a corridor) and spread these over an extended period.
The new version of IAS19 removes the second of these options.
The company most affected by this change is Royal Dutch Shell, which
had unrecognised losses of £10 billion at 31 December 2011. These mainly
represent losses caused by the financial turmoil of recent years which have
not yet been recognised in the balance sheet. The nine companies in the
FTSE 100 that use the “corridor” option will see these losses recognised
immediately on their balance sheets under the new standard, weakening
the balance sheet and bringing increased volatility in future.
Even though only a small number of companies in the FTSE 100 are
affected, balance sheets will receive a total hit of some £14 billion as
shown below.
Even though only nine companies in the FTSE 100 are affected, balance
sheets will receive a total hit of some £14 billion as follows:
Asset/liability recognised at 2011 year-end before deferred tax
CompanyCurrent
(£ million)New IAS19 (£ million)
Difference (£ million)
Old Mutual 54 44 (10)
Man 57 22 (35)
Glencore (39) (145) (106)
BG Group (67) (210) (143)
Evraz (192) (337) (145)
Lloyds Banking Group 1,131 592 (539)
International Airlines Group 877 (360) (1,237)
Barclays 1,653 (75) (1,728)
Royal Dutch Shell 5,871 (4,111) (9,982)
Total (13,925)
40 LCP Accounting for Pensions 2012
4. Accounting standards for pensions
Although their balance sheets will be affected, these companies will
show higher profits as they will no longer have to amortise these past
losses. For example, Royal Dutch Shell had a charge to profit of around
£350 million in 2011 that won’t be seen in future under the new standard.
This will help offset the reduction in profit caused by the removal of the
“expected return on assets”.
4.3 New disclosure rulesUnder the revised IAS19 accounting standard, there will be fewer
prescriptive rules and a greater emphasis on broad principles.
For example, companies will be required to explain the characteristics
of their pension schemes and the risks associated with them.
In theory, this should mean longer and more meaningful disclosures for
those companies whose pension risks are material and possibly shorter
more focused disclosures for companies whose pension risks are small
relative to the size of their business.
4.4 Other changes In addition to the main changes outlined above, the new IAS19 standard
includes a number of detailed changes to the rules. These include:
1. Changes to the way that companies must account for the running
costs of pension schemes.
2. Many changes to the rules on “special events”, such as how pension
scheme restructurings, redundancies and benefit changes are treated
in the accounts.
3. Changes to the way that liabilities are valued for some pension
schemes with unusual features - such as those where risks are shared
with employees - and schemes outside the UK.
Acc
oun
ting
sta
ndar
ds
fo
r p
ensi
ons
42
Contentp42 5. LCP’s analysis of FTSE 100
IAS19 disclosuresp44 5.1 Introduction
p44 5.2 Analysis of results
p49 5.3 Key assumptions
Assumptions for life expectancy increased again in 2011, but at a slower rate than seen in recent years. A handful of companies even reduced their assumptions on how long their employees will live.
Nick Bunch
Partner LCP
88
87
86
85
84
83
Life expectancy for a male aged 65
2005 2006 2007 2008 2009 2010 2011
Exp
ecte
d a
ge
at d
eath
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1 Allows for a £165 million investment
in group insurance policies.
LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures44
5.1 IntroductionWe have analysed 83 FTSE 100 companies reporting in 2011.
17 companies were excluded as they did not sponsor a material defined
benefit pension scheme. A full listing can be found in appendix 1.
We have concentrated on the financial position of the defined benefit
pension 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.
Overseas pension arrangements have been included, except where
otherwise indicated. We have analysed these arrangements in more
detail in section 6.
The disclosuresThe average pensions note runs to nearly five pages, with most
companies also having several paragraphs of pension commentary in
the main body of their reports. The longest disclosure was by Prudential, which dedicated 13 pages of its 2011 report to pensions.
For many FTSE 100 companies, pensions are financially significant and
the volume of information disclosed in the accounts reflects this.
However, for those companies whose pension arrangements are not so
material, even the minimum disclosure requirements under IAS19 can be
quite onerous. We have referred in section 4 to the forthcoming changes
in these disclosure requirements.
5.2 Analysis of resultsFunding levelsIAS19 takes a snapshot of the accounting surplus or deficit at the
company’s year-end and, if the company has not chosen to spread gains
and losses via the “corridor” option, this is generally the number that
appears on the balance sheet.
We have set out a full list of the disclosed accounting surpluses and
deficits of the FTSE 100 companies in appendix 1.
18 companies out of the 83 FTSE 100 companies disclosed assets equal to
or in excess of accounting liabilities, compared to 10 last year.
Prudential disclosed the highest 2011 funding level - 125% as at
31 December 20111. Just over half of companies reported being less than
90% funded on an accounting basis at their 2011 year-end, which is very
similar to the position in 2010.
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45LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures
Changes over 2011The chart below shows how worldwide funding levels have changed
over the year for the 52 FTSE 100 companies in our report which have
December 2011 year-ends.
Ratio of assets to IAS19 liabilities at end of December (%)
20
15
10
5
0 under 60 60 to 69 70 to 79 80 to 89 90 to 99 100 to 109 110 or over
Nu
mb
er o
f co
mp
anie
s
2010
2011
The average reported IAS19 funding level for companies with December
year-ends was 88% in 2011, the same as in 2010.
Sources of deficits and surplusesFor the 52 companies that produced December accounts in both 2010 and
2011, worldwide deficits did not change over 2011. This is illustrated in the
chart below.
IAS19 sources of deficits and surpluses for companies with December year-ends (£ billion)
New assumptions& experience
Overall movement in the deficit
Interest chargedInvestment returns and exchange rate differences
Benefits earned Contributions
30 25 20 15 10 5 0 5 10 15 20 25 30
Changes in liabilities
Changes in assets
88%The average IAS19 funding
level for companies reporting
at 31 December 2011.
LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures46
Our analysis shows that investment returns (£23.2 billion) comfortably
covered “interest” charges (£16.8 billion) and contributions paid
(£13.5 billion) were well above the IAS19 value of benefits earned over
the year (£4.8 billion). All other things being equal, the aggregate
deficit would have been lower as a result.
However, changes in IAS19 liability values (£15.1 billion), primarily as
a result of lower discount rates due to lower corporate bond yields,
offset those positive effects, leading to no overall change in deficit
for these companies.
Pension schemes in relation to their sponsoring companiesThe chart below shows the size of accounting liabilities relative
to companies’ market capitalisations. The average FTSE 100 pension
liability was 49% of market capitalisation, compared with 40% in 2010.
This increase was largely due to a reduction in corporate bond yields over
2011, which increased IAS19 liability values, combined with falls in equity
markets which reduced the market capitalisation of many companies.
As a result, pension schemes still pose a very significant risk for certain
companies. For example, International Airline Group’s accounting
liabilities were over six times the value of its market capitalisation.
Accounting liabilities as a proportion of market capitalisation (%)Accounting liabilities as a proportion of market capitalisation (%)
20
15
10
5
0under 5 5
to 1415
to 2425
to 4950
to 7475
to 99100
to 149150
to 199200
or over
Nu
mb
er
of
com
pan
ies
2010
2011
However, for some companies, even the size of the IAS19 pension
scheme deficit is significant compared to the value of the company itself.
For example, BAE Systems’ accounting deficit was over 45% the value of
its market capitalisation at its 2011 accounting year-end.
On average, pension scheme deficits were 4% of market capitalisation,
compared to 5% in 2010.
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5. LCP’s analysis of FTSE 100 IAS19 disclosures
What have companies done to tackle their deficits?FTSE 100 companies paid contributions totalling £16.9 billion to their
defined benefit pension schemes in 2011. This follows £17.0 billion in
2010 and £17.5 billion in 2009. Over half of companies paid higher
contributions during 2011 than in 2010, although a few, such as GKN
and HSBC, paid significantly less as a result of having paid large
contributions in the previous year.
The six companies that paid the highest contributions are shown in
appendix 2. BT, Barclays, Royal Bank of Scotland and Royal Dutch Shell all paid more than £1 billion into their schemes over their 2011 accounting
years. Barclays paid over £2 billion, an increase of £1.5 billion from the
previous year, following the triennial valuation of its main pension fund as
at 30 September 2010.
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.
However, eight companies paid contributions lower than or equal to the
IAS19 value of benefits promised over the year. These were British Land Company, Carnival, Fresnillo, Reed Elsevier, SABMiller, Sage, Standard Chartered and Tesco.
The chart below shows the “excess” contributions that companies paid
during the year (ie contributions over and above the IAS19 value of the
benefits earned during the year) as a proportion of the deficit that would
have been disclosed at the end of the year had these contributions not
been paid.
The highest proportion of deficit paid off was by Barclays which reduced
its 2011 year-end deficit by 96%.
Proportion of year-end deficits paid off over the year (%)Proportion of year-end deficits paid off over the year (%)
30
25
20
15
10
5
0Nil or in 1 to 9 10 to 19 20 to 29 30 to 39 40 to 49 50 to 59 60 or over surplus
Nu
mb
er
of
com
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2010
2011
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5. LCP’s analysis of FTSE 100 IAS19 disclosures48
Pension schemes versus shareholdersThe following chart shows how pension deficits compare to dividends
paid. Of the 65 FTSE 100 companies that disclosed a pension deficit in
2011, 26 disclosed a deficit that was greater than or equal to the dividends
paid to their shareholders in 2011. However, in 24 cases, the 2011 dividend
was more than double the pension scheme deficit at the 2011 financial
year-end.
Percentage of deficit that could be paid off with one year's declared dividends (%)Percentage of deficit that could be paid off with one year's declared dividends (%)
25
20
15
10
5
0under
5050
to 99100
to 149150
to 199200
to 249250
to 299300
to 349350
to 399400
or over
Nu
mb
er
of
com
pan
ies
2010
2011
The chart below shows the company contributions paid over the 2011
and 2010 accounting years as a percentage of dividends distributed over
these periods and therefore illustrates the amount of cash paid to the
pension scheme in preference to shareholders. In 2011, ten companies paid
more contributions into their pension schemes than they distributed in
dividends during their accounting year. This is the same number as in 2010.
Contributions paid as a proportion of dividends paid (%)Contributions paid as a proportion of dividends paid (%)
25
20
15
10
5
0under
1010
to 1920
to 2930
to 3940
to 4950
to 5960
to 6970
to 7980
to 8990
to 99100
or over
Nu
mb
er
of
com
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2010
2011
10The number of FTSE 100
companies that paid more
into their pension schemes
than they distributed to
shareholders in 2011.
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49LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures
5.3 Key assumptionsWe consider below the various assumptions used to place an IAS19 value
on pension benefits. 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.
Life expectancyUnder the IAS19 standard, companies are required to disclose any
“material actuarial assumptions”. Whilst no specific mention is made of
life expectancy in the standard, all of the companies in our survey apart
from Evraz and ICAP (where the defined benefit pension schemes are very
small in the context of the business) have disclosed some detail on this
assumption. 64 of the 83 companies with material defined benefit pension
schemes have provided sufficient information in their 2011 accounts for us
to derive basic mortality statistics - specifically a male life expectancy at
age 65 in the UK.
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.
Life expectancy assumptions reported in 2011Males aged 65 on the accounting dateLife expectancy assumptions reported in 2011Males aged 65 on the accounting date
25
20
15
10
5
085 or less 86 87 88 89 90 or above
Nu
mb
er
of
com
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Life expectancy (rounded to nearest age)
2010
2011
LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures50
In previous years, we have seen marked increases from year to year in
assumed life expectancy and in the allowance for future improvements
in life expectancy as companies have reflected the results of research
that showed people were living longer. This year, although assumed life
expectancy has increased again, the amount of the increase is much less
than in the recent past.
The average assumption was that male members in the UK who retire
at age 65 on the accounting date would live to 87.4 years - up from
87.1 years in the same companies’ 2010 accounts. However, the overall
rate of increase appears to be slowing.
Although 44 companies disclosed higher life expectancy assumptions
in 2011, adding 0.6 years on average to assumed life expectancy,
five companies disclosed lower life expectancy assumptions for some
or all of their membership. For example, Next reduced its assumed life
expectancy for a 65 year old male by 1.3 years, from 88.6 to 87.3.
British Land Company has adopted the longest life expectancy
assumption, stating in its 2011 accounts that male pensioners currently
aged 60 will live on average to age 90.
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 opposite the horizontal bars show the average life expectancy
for a male aged 65 in the UK for each sector, for which we have followed
the Industry Classification Benchmark as published by FTSE. The vertical
lines show the extent of the variation within each sector, which in most
cases increases the greater the number of companies within the sector.
87.4The average assumption
was that a man retiring in
the UK at age 65 would live
to 87.4 years.
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5. LCP’s analysis of FTSE 100 IAS19 disclosuresA
ge
at d
eath
92
90
88
86
84
82
80
2011
2010
Life expectancy assumptions reported in 2011 split by sectorMales aged 65 on accounting date
Fin
anci
als
Hea
lthc
are
Tele
com
mun
icat
ions
Oil
& G
as
Ind
ustr
ials
Bas
ic M
ater
ials
Uti
litie
s
Co
nsum
er S
ervi
ces
Co
nsum
er G
oo
ds
Companies in each sector at 31 December 2011
15 3 3 2 6 12 13 8 2
This chart shows that the highest average assumed life expectancies are
found in the financials and healthcare sectors, as last year. The lowest
average assumed life expectancies are found in the basic materials and
consumer goods sectors. However, the range of average assumptions
across sectors has tightened compared to 2010.
Future improvements in life expectancyAs 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.
Allowing for future improvements can result in a significant increase
in the IAS19 value of pension scheme liabilities, and hence deficits.
54 companies disclosed enough information in their accounts to analyse
how their allowance for future improvements in mortality has changed
compared to 2010. The chart overleaf shows the allowance that these
companies have made for increases in longevity over a period of 20 years.
LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures52
2010
2011
Additional life expectancy improvements reported in 2011Improvements for male members aged 65 now versus aged 65 in 2031Additional life expectancy improvements reported in 2011Improvements for male members aged 65 now versus aged 65 in 2031
25
20
15
10
5
0under
0.5 years0.5 to
0.99 years1 to
1.49 years1.5 to
1.99 years 2 to
2.49 years2.5 to
2.99 years3 to
3.49 years3.5 yearsor over
Nu
mb
er o
f co
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anie
s
Increase in life expectancy over next 20 years
In their 2011 accounts, FTSE 100 companies assumed that UK pensioners
retiring at age 65 in 20 years’ time will live for 2.1 years longer, on average,
than a pensioner retiring today. This is the same as the increase assumed
in 2010.
Overall, therefore, FTSE 100 companies increased their average
assumption for the life expectancy of a 65 year old in 2031 by 0.3 years,
from 89.2 years in their 2010 accounts to 89.5 years in 2011.
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 40 companies who reported at 31 December 2011,
together with the assumption for CPI inflation disclosed by 13 of these
companies. The results are summarised opposite.
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5. LCP’s analysis of FTSE 100 IAS19 disclosures
Discount ratesUnder 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.
2010
2011
Discount rates used in December 2010 and December 2011 (% pa)Discount rates used in December 2010 and December 2011 (% pa)
35
30
25
20
15
10
5
0under
4.74.7
to 4.894.9
to 5.095.1
to 5.295.3
to 5.495.5
to 5.695.7
or over
Nu
mb
er
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com
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The average discount rate fell over 2011, from 5.4% pa in December 2010
to 4.8% pa in December 2011. Over 80% of companies with a December
2011 year-end adopted a discount rate assumption in the range of 4.7% pa
to 4.9% pa. However, Centrica adopted a discount rate of 5.4% pa, which
was 0.4% pa higher than any of the other companies reporting at this date.
Inflation (RPI) assumptionsThe chart overleaf shows the average long-term inflation assumption as
measured by the Retail Prices Index (RPI). This shows that the average
RPI assumption adopted decreased from 3.5% pa in December 2010 to
3.1% pa in December 2011.
LCP Accounting for Pensions 2012
5. LCP’s analysis of FTSE 100 IAS19 disclosures54
2010
2011
RPI inflation used in December 2010 and December 2011 (% pa)RPI inflation used in December 2010 and December 2011 (% pa)
20
15
10
5
0under
2.92.9
to 3.093.1
to 3.293.3
to 3.493.5
to 3.693.7
or over
Nu
mb
er o
f co
mp
anie
s
For December 2011 year-ends, the highest RPI inflation assumption was
3.4% pa, adopted by Aggreko, International Power and Schroders.
At the other extreme Legal & General and RSA, who both reported at the
same date, adopted an assumption of 2.8% pa. In general, the RPI inflation
assumptions were more spread out than the discount rates adopted at the
end of 2011.
The Bank of England publishes 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 3.3% pa at the end of
December 2011. This suggests that, in order to justify an assumption as
low as 2.8% pa 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 opposite shows the difference between the discount rate and
the assumption for RPI inflation (the net discount rate) for companies
reporting as at 31 December 2010 and 31 December 2011.
Although the marked fall in corporate bond yields has been offset to some
extent by lower expectations of future inflation, the net discount rate has
still reduced since December 2010. Overall, this has had the effect of
increasing the IAS19 value of companies’ pension liabilities.
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5. LCP’s analysis of FTSE 100 IAS19 disclosures
2010
2011
Discount rates in excess of RPI inflation used in December 2010 and December 2011 (% pa)Discount rates in excess of RPI inflation used in December 2010 and December 2011 (% pa)
25
20
15
10
5
0under
1.41.4
to 1.591.6
to 1.791.8
to 1.992
to 2.192.2
or over
Nu
mb
er
of
com
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Inflation (CPI) assumptionsSince 2010 the statutory minimum increases that pension schemes must
provide have been linked to the Consumer Prices Index (CPI) rather than
the 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
now determined that some of the benefits in their pension scheme should
increase in line with CPI inflation and have allowed for the impact of the
change in inflation measure in their accounts.
As no significant market in CPI-linked securities currently exists,
emerging 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 overleaf shows the range of margins used by
companies in their December 2011 and December 2010 year-end accounts,
where such information was available.
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5. LCP’s analysis of FTSE 100 IAS19 disclosures56
Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)
9
8
7
6
5
4
3
2
1
0under 0.5 0.5 0.6 0.7 0.8 0.9 1.0 over 1.0
Nu
mb
er
of
com
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2010
2011
In February 2011 it emerged that a change to the way in which the
ONS monitors clothing prices is expected to lead to a larger long-term
difference in future CPI and RPI inflation. This was backed up by a
working paper published by the OBR in November 2011 which suggests
a “plausible range” for the long-term difference between CPI and RPI of
1.3% pa to 1.5% pa.
It appears that companies have been taking this into account when setting
their assumptions for CPI inflation. At 31 December 2011 the average
long-term margin below RPI was 0.9% pa compared to 0.6% pa at
31 December 2010, with most companies assuming a 1% pa differential
in 2011 compared to 0.5% pa in 2010.
0.9%paThe average assumed gap
between CPI and RPI inflation
at 31 December 2011, up from
0.6% pa in 2010.
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5. LCP’s analysis of FTSE 100 IAS19 disclosures
Salary growth assumptionsFor final salary schemes the assumed rate of salary growth affects
the disclosed IAS19 liability and the cost of benefits being earned.
A lower assumption for salary growth produces a lower projected
pension and hence lower pension liabilities, as well as a lower charge
to operating income.
The average salary increase assumption (in excess of the RPI inflation
assumption) has fallen from 0.7% pa in 2010 to 0.6% pa in 2011. In recent
years a number of companies have introduced caps on increases in
pensionable salary and as a result disclosed a salary increase assumption
lower than RPI inflation.
2010
2011
Salary growth rates used in excess of RPI inflation (% pa)Salary growth rates used in excess of RPI inflation (% pa)
25
20
15
10
5
0under 0 0
to 0.490.5
to 0.991
to 1.491.5
to 1.992
or over
Nu
mb
er
of
com
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As the number of active members in final salary pension schemes reduces,
the assumption for salary growth is becoming less significant.
Expected return on equitiesUnder IAS19 companies are not required to provide a breakdown of their
assumed asset returns on each asset class but can instead simply provide
an overall expected return for the pension assets. For those companies
where we could determine the assumption for future equity returns, there
is a wide range of values, reflecting the subjectivity in setting
this assumption.
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5. LCP’s analysis of FTSE 100 IAS19 disclosures58
2010
2011
Expected long-term rate of return on equities (% pa)Expected long-term rate of return on equities (% pa)
25
20
15
10
5
0under 6 6
to 6.496.5
to 6.997
to 7.497.5
to 7.998
to 8.498.5
or over
Nu
mb
er
of
com
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The lowest equity return assumption was 5% pa, disclosed by Resolution,
and the highest was 8.5% pa, adopted by Kingfisher. Where disclosed,
6 companies increased their assumed equity return, 35 reduced it and
16 companies did not alter their assumption from the previous year.
The average expected rate of return on equities was 4.0% pa higher
than the long-term yield available on gilts, measured by reference
to the FTSE over 15 year gilt yield index at the balance sheet date.
This difference can be said to represent companies’ views of the
so-called “equity risk premium”, which is the additional return expected
from investing in equities, compared with low risk assets such as gilts,
to compensate for the increase in risk. The average equity risk premium
has increased from 3.5% pa in 2010.
As highlighted in section 4, with the upcoming changes to IAS19,
the expected return on assets assumption will shortly be redundant.
At 31 December 2010, the average assumed difference between RPI and CPI was 0.6% pa. This had widened to 0.9% pa by 31 December 2011, with most companies assuming a gap of 1% pa.
Nick Bunch
Partner LCP
Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)
9
8
7
6
5
4
3
2
1
0under 0.5 0.5 0.6 0.7 0.8 0.9 1.0 over 1.0
Nu
mb
er
of
com
pan
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2010
2011
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Contentp60 6. Non-UK schemes of FTSE
100 companiesp62 6.1 Significance of non-UK
arrangements
p64 6.2 Deficit and risk
reduction measures
p66 6.3 Consistency of
assumptions
p68 6.4 European Pensions
Directive
FTSE 100 companies continue to adopt different life expectancy assumptions for employees in different countries, particularly the UK and US. It is not clear that this is always justified.
Shaun Southern
PartnerLCP
Lif
e ex
pec
tan
cy (
year
s)
92
90
88
86
84
82
80
201120102009
Disclosed life expectancies for a male at age 65 at the accounting date
Number of companies with pension schemes in each country for 2011
UK US Canada Germany Netherlands Ireland Switzerland
64 21 4 6 4 4 3
No
n-U
K s
chem
es
of
FTSE
10
0 c
om
pan
ies
LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies62
We have separately analysed the disclosures made by FTSE 100 companies in relation to their non-UK pension and post-retirement healthcare schemes and compared these to their UK disclosures.
6.1 Significance of non-UK arrangements45 FTSE 100 companies provided separate details of non-UK pension
liabilities amounting to £55 billion, of which over £20 billion was for
US schemes.
The average IAS19 funding level in 2011 was 71% (2010: 70%) for their
non-UK pension arrangements compared to 96% (2010: 93%) for the
UK schemes of the same companies. This reflects, among other factors,
different practices in overseas countries regarding the separate funding
of their post-retirement liabilities.
The chart below shows the 15 companies with the largest disclosed
non-UK pension liabilities relative to market capitalisation.
Disclosed non-UK pension liabilities as proportion of market capitalisation (%)
Rexam
BAE Systems
GKN
International Airlines Group*
Tate & Lyle
CRH
Smiths
BP
Evraz
Meggitt
RSA
Aviva
IMI
HSBC
Rolls-Royce
*No 2010 figure is shown as the group was formed in 2011
0 10 20 30 40 50 60 70 80 90 100
20112010
No
n-U
K s
chem
es
of
FTSE
10
0 c
om
pan
ies
63LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies
The chart below shows the 15 companies that disclosed the highest
non-UK pension liabilities as a proportion of the total pension liabilities.
CRH and WPP have over 60% of their total pension liabilities in overseas
pension schemes.
Disclosed non-UK pension liabilities as proportion of total pension liabilities (%)
CRH
WPP
Smith & Nephew
Rexam
BP
Standard Chartered
Anglo American
AstraZeneca
Meggitt
Tate & Lyle
Diageo
Intertek
GlaxoSmithKline
InterContinental Hotels Group
HSBC
0 10 20 30 40 50 60 70 80 90 100
2011
2010
A number of very large multinationals including BAT, BHP Billiton,
Imperial Tobacco, National Grid, Royal Dutch Shell and Unilever provide
figures only for their global pension liabilities and do not provide any
breakdown by country or region. The 2011 pension liabilities for these
companies amounted to £91 billion, with the non-UK part likely to be a
significant proportion of the total liability.
LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies64
In addition, a number of FTSE 100 companies, including Evraz, SABMiller and Xstrata, have most, if not all, of their pension liability outside the UK
and have been excluded from the chart above.
6.2 Deficit and risk reduction measuresA number of FTSE 100 companies have provided details of measures that
they have taken to reduce pension deficits and reduce pension risks in
their non-UK schemes. Examples are given below.
As seen in the examples above, a number of FTSE 100 companies have
taken some significant steps to reduce their non-UK pension risks.
Progress made in this strategy varies between countries. Based on our
analysis of the disclosures of FTSE 100 companies combined with our own
experience, we illustrate opposite key risk exposures remaining in different
locations together with the development of the insurer buy-out market.
Company Reported deficit and risk reduction measures
Anglo American Schemes in Southern Africa ceased future accrual of benefits.
CRHImplemented changes to a number of its schemes in the
Eurozone and Switzerland giving rise to a gain of €29 million.
IMIDuring the year four defined benefit arrangements were
wound-up, one was closed to new entrants and one to
future accrual.
Tate & LyleThe company closed its main US pension schemes to future
accrual from 1 January 2011.
Marks & SpencerEmployees’ future annual increases in pensionable pay in the
Irish pension scheme were capped at 4% giving rise to a
one-off pension credit of £10.7 million.
No
n-U
K s
chem
es
of
FTSE
10
0 c
om
pan
ies
65LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies
Significant risk exposures remain globally, most notably investment risks
in the US and recognition of longevity risk in Germany. Compared to the
UK, most countries lag behind in addressing pension risks both in terms of
closure to accrual and development of insurer transfer solutions.
Exposure to volatile asset classes
Low HighNetherlandsGermany
IrelandUKUS
Canada
Switzerland
US
Canada
Switzerland
Netherlands
Germany
UK
Ireland
Exposure to inflation
Low High
Recognition of longevity
High UKIreland
NetherlandsUS
CanadaGermany
Switzerland Low
Development of buy-out market
DevelopedUn-
developedUKIreland
Netherlands
USCanada
GermanySwitzerland
LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies66
6.3 Consistency of assumptionsDiscount ratesAs for the UK, companies use a range of discount rates to value their
pension liabilities in other countries. In the chart below, the horizontal bars
show the average discount rate for FTSE 100 companies with 31 December
year-ends for each location where this can be identified and how they
have moved since 2010 and 2009. The vertical lines show the extent of the
variation within each location in 2011.
8
7
6
5
4
3
2
1
0
201120102009
Disclosed discount rates for companies reporting at 31 December (% pa)
Number of companies with pension schemes in each country for 2011
Dis
cou
nt
rate
(%
pa)
UK US Canada Germany Netherlands Ireland Switzerland
39 15 5 2 2 2 4
This analysis suggests that companies adopt a wider range of discount
rates in the US than in other locations.
It also shows that, in all countries, average discount rates fell during 2011.
The average discount rate across all locations decreased by around
0.6% pa which will have increased accounting liabilities by around 10%.
No
n-U
K s
chem
es
of
FTSE
10
0 c
om
pan
ies
67LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies
Life expectancyFTSE 100 companies continue to adopt a wide range of life expectancy
assumptions in different countries, particularly in the UK and US, as shown
in the chart below. The horizontal bars show the average life expectancy
for a male at age 65 at the accounting date for different locations and how
they have moved since 2010 and 2009. The vertical lines show the extent
of the variation within each location in 2011.
This chart shows that FTSE 100 companies continue to assume that,
on average, pensioners in the UK will live for longer than pensioners
in most other countries. Over 2011 the gap to the UK increased for all
countries except Switzerland and the Netherlands. New tables have
recently been introduced in Switzerland which have resulted in companies
updating their assumptions in 2011.
If UK life expectancies were assumed for non-UK employees, non-UK
pension liabilities of FTSE 100 companies could increase by more than
£8 billion.
Lif
e ex
pec
tan
cy (
year
s)
92
90
88
86
84
82
80
201120102009
Disclosed life expectancies for a male at age 65 at the accounting date
Number of companies with pension schemes in each country for 2011
UK US Canada Germany Netherlands Ireland Switzerland
64 21 4 6 4 4 3
3.2 yearsThe difference in average life
expectancy assumption for a
man at age 65 in the UK and
in the US.
LCP Accounting for Pensions 2012
6. Non-UK schemes of FTSE 100 companies68
The table below sets out the average life expectancy now and in
20 years’ time (where this has been disclosed) for a male at age 65
at the accounting date for FTSE 100 companies for different countries.
CountryNumber of
companies
Life expectancy
(current)
Life expectancy
(20 years’ time)
Additional life
expectancy
(years)
UK 54 87.4 89.5 2.1
US 17 84.2 85.0 0.8
Germany 6 83.6 85.8 2.2
Ireland 4 86.9 89.6 2.7
Canada 3 84.4 86.1 1.7
Netherlands 3 85.8 87.1 1.3
Switzerland 2 84.3 85.7 1.4
This shows that FTSE 100 companies currently allow for the greatest
level of future improvements in mortality in the UK, Germany and Ireland.
The smallest allowance is in respect of their pension schemes in the US
- indeed some FTSE 100 companies, including Bunzl, Compass, GKN,
National Grid, Smiths and Tate & Lyle, appear to be making no explicit
allowance for any future improvements in mortality for their US pension
schemes.
6.4 European Pensions DirectiveThe introduction of new “risk-free” reserving rules under the proposed
European Pension Directive would impact the cash funding and investment
strategies of most defined benefit schemes (and to a lesser extent defined
contribution schemes) in the EU. We would expect a significant increase
in the measure of liabilities for cash funding purposes and an increase in
interest for transferring pension liabilities to insurers.
FTSE 100 companies with defined benefit schemes in the EU should be
closely monitoring the position. In particular, in the UK, Ireland and the
Netherlands (the three main providers of defined benefit pension schemes
in the EU), funding reserves could increase dramatically.
As insurance companies will soon be complying with “risk-free” reserving
under Solvency II, countries like Sweden, where insurers are the main
providers of defined benefit pensions, will see less of an impact if the
proposals for pension scheme funding are subsequently introduced.
Thi
s ta
ble
sho
ws
the
key
dis
clo
sure
s m
ade
by
the
com
pan
ies
in t
he F
TS
E 1
00
as
at 3
1 D
ecem
ber
20
11 t
hat
rep
ort
ed IA
S19
fig
ures
in t
heir
20
11 a
cco
unts
. The
so
urce
of
the
dat
a is
each
co
mp
any’
s an
nual
rep
ort
and
acc
oun
ts f
or
the
acco
unti
ng p
erio
d e
ndin
g in
20
11. T
he m
arke
t va
lue
of
asse
ts a
nd s
urp
lus/
(defi
cit)
fig
ures
rel
ate
to t
he w
orl
dw
ide
po
siti
on
of
each
co
mp
any,
no
t ju
st t
he U
K s
chem
es. F
igur
es a
re s
how
n b
efo
re d
efer
red
tax
and
bef
ore
any
bal
ance
she
et a
sset
lim
its
have
bee
n ap
plie
d. A
ll fi
gur
es a
re r
oun
ded
to
the
near
est
mill
ion
po
und
s. T
he d
isco
unt
rate
and
pri
ce in
flat
ion
assu
mp
tio
ns r
efer
to
tho
se d
iscl
ose
d f
or
the
com
pan
ies’
mai
n U
K s
chem
es w
here
ava
ilab
le. “
ND
” m
eans
no
UK
spec
ific
fig
ures
wer
e d
iscl
ose
d.
2011
Surp
lus/
(defi
cit)
Co
mp
any
Year
-en
dM
arke
t va
lue
of
asse
ts
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
Ag
gre
koD
ec59
(6)
(6)
4.8
03.
40
5.50
Y
AM
EC
Dec
1,56
9(4
9)
(49
)4
.70
3.0
08
.10Y
Ang
lo A
mer
ican
Dec
1,679
(136
)(2
3)N
DN
DN
DN
Ass
oci
ated
Bri
tish
Fo
od
sS
ep2,
788
(36
)15
5.10
3.30
6.7
0Y
Ast
raZ
enec
aD
ec5,
516
(1,7
35)
(1,4
16)
4.8
03.
207.
50Y
Avi
va3
Dec
11,7
91
1,26
41,3
80
4.9
03.
105.
80
Y
BA
E S
yste
ms4
Dec
17,9
80
(4,2
01)
(4,0
06
)4
.80
2.9
07.
25N
Bar
clay
s5D
ec22
,74
8(7
5)8
84
.74
3.0
47.
70Y
BG
Gro
up5
Dec
829
(210
)(1
71)
5.0
03.
107.
30Y
BH
P B
illit
on
Jun
1,157
(110
)(5
1)5.
40
3.50
8.10
Y
BP
Dec
22,15
0(5
,814
)(2
,033
)4
.80
3.20
8.0
0Y
Bri
tish
Am
eric
an T
ob
acco
Dec
5,18
4(6
65)
(46
8)
4.7
03.
00
6.0
0Y
Bri
tish
Lan
d C
om
pan
y (T
he)
Mar
110
1111
5.50
3.70
8.4
0Y
BT
Gro
upM
ar37
,222
(1,8
30)
(1,7
60
)5.
503.
40
7.9
0Y
Bun
zlD
ec27
2(7
4)
(60
)N
DN
DN
DN
Cap
ita
Gro
up (
The
)6D
ec57
8(8
6)
(86
)4
.90
3.0
0se
e no
te 6
Y
Car
niva
lN
ov21
84
45.
00
3.10
ND
Y
Cen
tric
aD
ec4
,670
330
364
5.4
03.
307.
70Y
Co
mp
ass
Gro
upS
ep1,7
73(2
93)
(111
)5.
103.
00
7.0
0Y
CR
HD
ec1,5
69
(533
)(4
98
)4
.70
3.0
07.
50Y
Dia
geo
Jun
6,0
35(8
24)
(64
3)5.
60
3.6
08
.30
Y
Evr
az5
Dec
306
(337
)(3
37)
ND
ND
ND
N
Exp
eria
nM
ar57
14
26
65.
60
3.50
ND
Y
Fre
snill
oD
ec19
(6)
(2)
ND
ND
ND
N
G4
SD
ec1,5
39(3
35)
(28
6)
5.0
03.
10N
DY
GK
ND
ec2,
69
3(8
68
)(4
65)
4.7
03.
00
7.8
0Y
2010
Surp
lus/
(defi
cit)
Mar
ket
valu
e o
f as
sets
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
53(3
)(3
)5.
303.
706
.60
Y
1,435
2727
5.4
03.
40
7.70
Y
1,74
8(6
9)
40
ND
ND
ND
N
2,6
90
(86
)(3
5)5.
203.
507.
10Y
5,0
36(1
,60
7)(1
,29
1)5.
503.
60
8.0
0Y
11,4
16(3
)12
75.
503.
507.
20Y
17,3
37(3
,125)
(2,9
59)
5.50
3.4
08
.25
N
18,9
05
(2,7
38)
(2,6
38)
5.31
3.50
8.4
0Y
824
(151
)(1
12)
5.50
3.50
7.70
Y
1,021
(14
2)(8
3)5.
503.
508
.30
Y
21,9
03
(2,9
00
)6
755.
503.
508
.00
Y
5,11
4(3
98
)(2
24)
5.4
03.
40
7.20
Y
98
33
5.50
3.9
08
.50
Y
35,4
29(7
,86
4)
(7,8
10)
5.50
3.6
08
.50
Y
258
(53)
(38
)N
DN
DN
DN
64
8(2
5)(2
5)5.
40
3.4
0se
e no
te 6
Y
203
77
5.50
3.50
ND
Y
4,3
35(2
39)
(20
6)
5.70
3.70
8.0
0Y
1,639
(39
0)
(216
)5.
00
3.10
7.20
Y
1,56
2(3
84
)(3
50)
5.30
3.4
07.
50Y
5,36
7(1
,20
2)(1
,00
8)
5.4
03.
308
.10Y
297
(29
3)(2
93)
ND
ND
ND
N
541
(49
)(2
5)5.
503.
70N
DY
21(4
)(0
)N
DN
DN
DN
1,40
0(3
02)
(26
1)5.
503.
50N
DY
2,6
60
(60
0)
(19
3)5.
40
3.35
7.8
0Y
69LCP Accounting for Pensions 2012
Appendix 1: FTSE 100 accounting disclosure listing
70
2011
Surp
lus/
(defi
cit)
Co
mp
any
Year
-en
dM
arke
t va
lue
of
asse
ts
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
Gla
xoS
mit
hKlin
eD
ec12
,858
(1,4
76)
(1,0
98
)4
.80
3.0
08
.00
Y
Gle
nco
re In
tern
atio
nal5
Dec
183
(14
8)
(14
8)
ND
ND
ND
N
Ham
mer
son
Dec
52(3
1)(1
9)
4.7
03.
20N
DN
HS
BC
Ho
ldin
gs
Dec
22,5
04
(136
)25
54
.80
3.20
7.20
Y
ICA
PM
ar7
(1)
(1)
ND
ND
ND
N
IMI
Dec
1,19
6(1
89
)(1
25)
4.8
03.
107.
10Y
Imp
eria
l To
bac
co G
roup
Sep
2,8
76(7
54)
(67)
5.4
03.
207.
60
Y
Inte
rCo
ntin
enta
l Ho
tels
Gro
upD
ec4
45
(48
)21
4.7
03.
107.
40
Y
Inte
rnat
iona
l Air
lines
Gro
up5
Dec
16,2
63
(36
0)
(16
3)4
.85
2.9
5N
DN
Inte
rnat
iona
l Po
wer
Dec
766
(20
9)
(20
9)
4.8
03.
40
5.8
0Y
Inte
rtek
Gro
upD
ec9
7(1
1)(1
1)4
.90
ND
ND
Y
ITV
Dec
2,6
46
(39
0)
(351
)4
.70
3.0
07.
00
Y
John
son
Mat
they
Mar
1,137
(93)
(81)
5.50
3.50
8.10
Y
Kin
gfi
sher
Jan
1,64
5(5
8)
(58
)5.
60
3.50
8.5
0Y
Land
Sec
urit
ies
Gro
upM
ar15
19
95.
703.
707.
50Y
Leg
al &
Gen
eral
Gro
up3
Dec
1,40
7(2
88
)(2
88
)4
.70
2.8
06
.50
Y
Lloy
ds
Ban
king
Gro
up5
Dec
28,8
2859
259
25.
00
3.0
08
.30
Y
Man
Gro
up5
7M
ar25
022
225.
503.
507.
60
Y
Man
Gro
up5
7D
ec24
5(3
)(3
)4
.80
3.20
6.9
0Y
Mar
ks &
Sp
ence
r G
roup
Ap
r5,
398
182
183
5.50
3.4
08
.40
Y
Meg
git
tD
ec58
5(2
65)
(19
8)
4.7
03.
00
7.50
Y
Mo
rris
on
(Wm
) S
uper
mar
kets
Jan
2,30
438
385.
60
3.8
07.
45
Y
Nat
iona
l Gri
dM
ar18
,90
3(5
77)
(352
)5.
503.
50N
DY
Nex
tJa
n50
756
63
5.70
3.6
07.
70Y
Old
Mut
ual5
Dec
594
48
48
4.7
03.
305.
80
N
Pea
rso
nD
ec2,
157
(23)
14
.90
3.0
0N
DY
Pru
den
tial
3D
ec7,
051
1,431
1,431
4.7
02.
90
6.8
0Y
2010
Surp
lus/
(defi
cit)
Mar
ket
valu
e o
f as
sets
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
12,15
6(1
,223
)(8
77)
5.50
3.50
8.0
0Y
171
(99
)(9
9)
ND
ND
ND
N
51(2
6)
(15)
5.4
03.
50N
DN
19,18
8(1
,834
)(1
,48
4)
5.4
03.
708
.40
Y
8(1
)(1
)N
DN
DN
DN
1,116
(18
4)
(126
)5.
503.
507.
40
Y
2,9
60
(84
2)(6
2)5.
103.
107.
80
Y
387
(74
)(8
)5.
303.
508
.90
Y
15,2
79(8
25)
(577
)5.
503.
45
ND
N
336
(10
8)
(10
8)
5.30
3.6
07.
70Y
96
(6)
(6)
5.4
0N
DN
DY
2,4
33(3
13)
(276
)5.
40
3.4
07.
80
Y
1,04
5(2
02)
(18
9)
5.50
3.70
8.2
5Y
1,518
(19
8)
(19
8)
5.50
3.4
07.
90
Y
142
(7)
(7)
5.6
03.
80
7.50
Y
1,29
3(2
34)
(234
)5.
503.
40
6.5
0Y
26,3
82
(48
0)
(48
0)
5.50
3.4
08
.30
Y
258
55
5.50
3.70
7.9
0Y
4,9
49
(351
)(3
50)
5.50
3.6
08
.40
Y
568
(211
)(1
41)
5.4
03.
307.
70Y
2,11
1(1
7)(1
7)5.
65
3.6
07.
25Y
18,18
6(1
,412
)(1
,186
)5.
60
3.8
0N
DY
433
(50
)(4
3)5.
703.
60
7.70
Y
1,119
142
142
5.4
03.
707.
20N
1,98
2(4
8)
(28
)5.
503.
50N
DY
5,9
1322
122
15.
45
3.55
8.2
0Y
LCP Accounting for Pensions 2012
Appendix 1: FTSE 100 accounting disclosure listing
71
2011
Surp
lus/
(defi
cit)
Co
mp
any
Year
-en
dM
arke
t va
lue
of
asse
ts
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
Rec
kitt
Ben
ckis
er G
roup
Dec
1,112
(337
)(2
33)
4.8
03.
108
.10Y
Ree
d E
lsev
ier
Dec
3,6
34(2
42)
(87)
ND
ND
ND
N
Res
olu
tio
n Li
mit
edD
ec1,2
94
5252
4.9
0N
D5.
00
Y
Rex
amD
ec2,
811
(40
7)(3
21)
4.7
03.
106
.11Y
Rio
Tin
toD
ec8
,49
0(3
,023
)(2
,417
)4
.70
3.0
0N
DN
Ro
lls-R
oyce
Gro
upD
ec10
,016
1,251
1,74
64
.70
3.10
6.0
0N
Roy
al B
ank
Of
Sco
tlan
d G
roup
(T
he)
Dec
25,0
86
(2,0
51)
(1,8
88
)5.
00
3.0
07.
70Y
Roy
al D
utch
She
ll5D
ec4
1,36
4(4
,111)
(1,7
93)
ND
ND
ND
N
RS
A In
sura
nce
Gro
upD
ec5,
813
(135
)(6
7)4
.90
2.8
08
.00
Y
SA
BM
iller
Mar
239
(89
)28
ND
ND
ND
N
Sag
e G
roup
(T
he)
Sep
18(1
2)(1
2)N
DN
DN
DN
Sai
nsb
ury
(J)
Mar
4,6
14(3
40
)(3
31)
5.50
3.30
7.70
Y
Sch
rod
ers
Dec
764
5656
4.6
03.
40
6.8
0Y
Sco
ttis
h &
So
uthe
rn E
nerg
yM
ar2,
46
4(2
94
)(2
94
)5.
503.
507.
80
Y
Ser
co G
roup
8D
ec1,7
47
(29
0)
(24
2)N
DN
DN
DN
Sev
ern
Tren
tM
ar1,4
73(2
92)
(28
4)
5.6
03.
507.
85
Y
Sm
ith
& N
ephe
wD
ec6
86
(16
1)(1
45)
4.9
03.
107.
20Y
Sm
iths
Gro
upJu
l3,
273
(175
)(1
07)
5.30
3.50
7.9
0Y
Sta
ndar
d C
hart
ered
Dec
1,36
3(3
01)
(20
5)4
.80
3.10
8.0
0Y
Sta
ndar
d L
ife
Dec
2,75
64
41
515
4.6
03.
15N
DY
Tate
& L
yle
Mar
1,24
5(4
1)1
5.50
3.6
08
.40
Y
Tesc
oF
eb5,
60
8(1
,356
)(1
,29
1)N
DN
DN
DY
Uni
leve
rD
ec13
,311
(2,11
9)
(1,0
50)
4.7
03.
00
7.30
Y
Uni
ted
Uti
litie
s G
roup
Mar
1,718
(19
5)(1
87)
5.50
3.35
ND
Y
Ved
anta
Res
our
ces
Mar
24(3
5)(3
5)N
DN
DN
DN
Vo
daf
one
Gro
upM
ar1,5
5810
70N
DN
DN
DY
Wei
r G
roup
(T
he)
Dec
60
6(8
5)(7
6)
4.8
03.
108
.10Y
2010
Surp
lus/
(defi
cit)
Mar
ket
valu
e o
f as
sets
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
1,054
(332
)(2
32)
5.4
03.
60
8.10
Y
3,50
7(1
70)
(24
)N
DN
DN
DN
1,113
66
66
5.51
ND
7.0
0Y
2,6
37(3
34)
(253
)5.
40
3.50
7.51
Y
8,4
80
(2,0
95)
(1,5
19)
5.4
03.
40
7.6
0N
8,2
1711
56
94
5.50
3.6
07.
50N
22,8
16(2
,183)
(2,0
22)
5.50
3.30
7.70
Y
40
,48
8(1
,655
)4
52N
DN
DN
DN
5,26
4(1
55)
(85)
5.50
3.10
8.0
0Y
226
(10
9)
3N
DN
DN
DN
15(1
1)(1
1)N
DN
DN
DN
4,2
37(4
21)
(412
)5.
80
3.4
08
.00
Y
69
334
345.
203.
708
.20
Y
2,29
8(4
64
)(4
64
)5.
503.
708
.00
Y
1,533
(30
7)(2
58)
ND
ND
ND
N
1,39
3(3
55)
(34
7)5.
703.
60
8.0
0Y
616
(14
5)(1
31)
5.50
3.50
7.4
0Y
3,0
43
(28
1)(2
15)
5.4
03.
208
.20
Y
1,377
(177
)(8
8)
5.50
3.50
8.0
0Y
2,22
821
627
85.
303.
35N
DY
1,172
(156
)(1
14)
5.50
3.70
8.10
Y
4,6
96
(1,8
40
)(1
,78
6)
ND
ND
ND
Y
13,7
64
(1,2
19)
(123
)5.
40
3.10
7.70
Y
1,911
(271
)(2
64
)5.
703.
30N
DY
22(2
4)
(24
)N
DN
DN
DN
1,48
7(2
03)
(138
)N
DN
DN
DY
595
(65)
(57)
5.4
03.
40
7.70
Y
LCP Accounting for Pensions 2012
Appendix 1: FTSE 100 accounting disclosure listing
72
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
sp
lit t
heir
pen
sio
n sc
hem
e su
rplu
s/(d
efici
t) b
etw
een
shar
eho
lder
and
wit
h-p
rofi
t fu
nds
and
ho
ld g
roup
insu
ranc
e p
olic
ies
in r
esp
ect
of
som
e o
f th
eir
ob
ligat
ions
.
W
e ha
ve in
clud
ed t
he IA
S19
val
ue o
f th
ese
po
licie
s in
the
fig
ures
sta
ted
ab
ove,
as
follo
ws:
Avi
va: £
0m
(20
10: £
1,44
5m),
Leg
al &
Gen
eral
: £58
3m (
2010
: £51
4m
), P
rud
enti
al: £
165m
(20
10: £
254
m).
4 T
he fi
gur
es f
or
BA
E S
yste
ms
excl
ude
£9
65m
of
its
2011
defi
cit
(£6
96
m in
20
10)
whi
ch is
allo
cate
d t
o e
qui
ty a
cco
unte
d in
vest
men
ts a
nd o
ther
par
tici
pat
ing
em
plo
yers
and
incl
ude
£4
03m
(£
261m
in 2
010
)
of
asse
ts h
eld
in t
rust
.
5 A
ll o
f th
e co
mp
anie
s ab
ove
acco
unte
d u
sing
imm
edia
te r
eco
gni
tio
n o
f g
ains
and
loss
es (
thro
ugh
“Oth
er C
om
pre
hens
ive
Inco
me”
), w
ith
the
exce
pti
on
of
Bar
clay
s, B
G G
roup
, Evr
az, G
lenc
ore
Inte
rnat
iona
l,
In
tern
atio
nal A
irlin
es G
roup
, Llo
yds
Ban
king
Gro
up, M
an G
roup
, Old
Mut
ual a
nd R
oyal
Dut
ch S
hell,
who
op
ted
to
sp
read
gai
ns a
nd lo
sses
und
er IA
S19
.
6 C
apit
a G
roup
dis
clo
sed
an
assu
mp
tio
n fo
r ex
pec
ted
ret
urn
on
equi
ties
/hed
ge
fund
s/ab
solu
te r
etur
ns o
f 6
.2%
pa
to 6
.7%
pa
as a
t it
s 20
11 a
cco
unti
ng d
ate
(20
10: 5
.5%
pa
to 7
.6%
pa)
.
7 M
an G
roup
cha
nged
its
acco
unti
ng y
ear-
end
fro
m M
arch
to
Dec
emb
er d
urin
g 2
011
. W
e ha
ve in
clud
ed d
etai
ls o
f b
oth
the
31
Mar
ch 2
011
and
31
Dec
emb
er 2
011
dis
clo
sure
s in
the
tab
le a
bov
e, b
ut h
ave
bas
ed a
ll o
f
the
anal
ysis
in t
his
rep
ort
on
Man
Gro
up’s
Mar
ch a
cco
unts
.
8 T
he fi
gur
es q
uote
d f
or
Ser
co G
roup
rel
ate
to t
he t
ota
l acr
oss
all
defi
ned
ben
efit
pen
sio
n sc
hem
es.
So
me
of
the
surp
lus/
(defi
cit)
rel
ates
to
co
ntra
cts
und
er w
hich
the
pen
sio
n co
sts
are
due
to
be
reim
bur
sed
.
The
20
11 fi
gur
es a
re a
s at
the
end
of
the
acco
unti
ng p
erio
ds
end
ing
in 2
011
. T
he 2
010
fig
ures
are
as
at t
he s
tart
of
the
acco
unti
ng p
erio
d.
All
fig
ures
sho
wn
abov
e w
ere
take
n fr
om
IAS
19 d
iscl
osu
res.
Fig
ures
hav
e
bee
n co
nver
ted
to
po
und
ste
rlin
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.
Whe
re d
iscl
ose
d, t
he s
urp
lus/
(defi
cit)
att
rib
utab
le t
o f
und
ed s
chem
es is
als
o s
how
n ab
ove.
The
dis
coun
t ra
te a
nd in
flat
ion
assu
mp
tio
n re
fer
to 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
7 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, A
RM
Ho
ldin
gs,
Ash
mo
re G
roup
, Bri
tish
Sky
Bro
adca
stin
g,
Bur
ber
ry G
roup
, Cai
rn E
nerg
y, C
apit
al S
hop
pin
g C
entr
es G
roup
, Ess
ar E
nerg
y, E
uras
ian
Nat
ural
Res
our
ces,
Har
gre
aves
Lan
sdo
wn,
Kaz
akhm
ys, P
etro
fac,
Po
lym
etal
Inte
rnat
iona
l, R
and
go
ld R
eso
urce
s,
Shi
re a
nd T
ullo
w O
il.
The
fo
llow
ing
thr
ee c
om
pan
ies
have
ent
ered
the
FT
SE
10
0 in
dex
sin
ce 3
1 D
ecem
ber
20
11 a
nd h
ence
are
no
t in
clud
ed in
our
sur
vey:
Ab
erd
een
Ass
et M
anag
emen
t, B
abco
ck In
tern
atio
nal a
nd C
rod
a In
tern
atio
nal.
The
follo
win
g t
hree
co
mp
anie
s ha
ve e
xite
d t
he F
TS
E 1
00
ind
ex s
ince
31
Dec
emb
er 2
011
: Cai
rn E
nerg
y, E
ssar
Ene
rgy
and
Man
Gro
up.
2011
Surp
lus/
(defi
cit)
Co
mp
any
Year
-en
dM
arke
t va
lue
of
asse
ts
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
Whi
tbre
adM
ar1,2
57(4
88
)(4
88
)5.
60
3.4
58
.20
Y
Wo
lsel
eyJu
l8
89
(36
0)
(28
3)5.
40
3.70
7.30
Y
WP
PD
ec6
54(2
81)
(133
)4
.70
ND
7.50
Y
Xst
rata
Dec
1,529
(44
5)(4
40
)N
DN
DN
DN
2010
Surp
lus/
(defi
cit)
Mar
ket
valu
e o
f as
sets
£m
Tota
l
£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te
% p
a
Infla
tion1
% p
a
Exp
ecte
d
retu
rn o
n eq
uiti
es
% p
a
Dis
clo
sed
m
ort
alit
y?2
1,28
1(4
34)
(434
)5.
60
3.50
8.2
0Y
724
(432
)(3
65)
5.4
03.
40
7.30
Y
631
(24
0)
(10
6)
5.4
0N
D7.
50Y
1,40
7(4
00
)(3
95)
ND
ND
ND
N
LCP Accounting for Pensions 2012
Appendix 1: FTSE 100 accounting disclosure listing
73
These tables show the key results of
analysis of the disclosures made by
the companies in the FTSE 100 as at
31 December 2011 that were reported
in their 2011 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 2011.
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 figures.
Largest liabilities
Company2011
Liabilities £m2010
Liabilities £m
Royal Dutch Shell 45,475 42,143
BT Group 39,052 43,293
Lloyds Banking Group 28,236 26,862
BP 27,964 24,803
Royal Bank Of Scotland Group 27,137 24,999
BAE Systems1 23,146 21,158
Largest deficits
Company2011
Deficit £m2010
Deficit £m
BP 5,814 2,900
BAE Systems2 4,201 3,125
Royal Dutch Shell 4,111 1,655
Rio Tinto 3,023 2,095
Unilever 2,119 1,219
Royal Bank Of Scotland Group 2,051 2,183
2 The figures for BAE Systems exclude £965m of its 2011 deficit (£696m in 2010) allocated to
equity accounted investments and other participating employers and include £403m (£261m
in 2010) of assets held in trust.
1 The figures for BAE Systems include all liabilities of the multi-employer plans that the
group participates in.
Largest liabilities compared to market capitalisation
Company Liabilities £m Market cap £m
2011Liabilities/
Market cap %
2010Liabilities/
Market cap %
International Airlines Group3 16,623 2,734 608 n/a
BT Group 39,052 14,352 272 452
BAE Systems1 23,146 9,249 250 188
Royal Bank Of Scotland Group 27,137 11,953 227 110
RSA Insurance Group 5,948 3,708 160 124
Lloyds Banking Group 28,236 17,634 160 60
3 As International Airlines Group formed during 2011 there is no corresponding value for 2010.
LCP Accounting for Pensions 2012
Appendix 2: FTSE 100 accounting risk measures
LCP Accounting for Pensions 2012
Appendix 2: FTSE 100 accounting risk measures74
Largest deficit compared to market capitalisation
Company Deficit £m Market cap £m
2011Deficit/
Market cap %
2010Deficit/
Market cap %
BAE Systems2 4,201 9,249 45 28
GKN 868 2,836 31 17
Royal Bank Of Scotland Group 2,051 11,953 17 10
Whitbread 488 3,131 16 17
ITV 390 2,650 15 11
Rexam 407 3,088 13 11
4 Prudential splits its pension scheme surplus/(deficit) between shareholder and with-profit funds and holds group insurance policies
in respect of some of its obligations. We have included the IAS19 value of these policies in the asset and liability figures stated above,
which was £165m for 2011 (2010: £254m).
Highest funding level
Company Assets £m Liabilities £m
2011Assets/
Liabilities %
2010Assets/
Liabilities %
Prudential4 7,051 5,620 125 104
Standard Life 2,756 2,315 119 111
Rolls-Royce Group 10,016 8,765 114 101
Next 507 451 112 90
Aviva 11,791 10,527 112 100
British Land Company 110 99 111 103
Lowest funding level
Company Assets £m Liabilities £m
2011Assets/
Liabilities %
2010Assets/
Liabilities %
Vedanta Resources 24 60 41 47
Evraz 306 643 48 50
Glencore International 183 331 55 63
Sage Group 18 30 60 57
Hammerson 52 82 63 66
Meggitt 585 850 69 73
75LCP Accounting for Pensions 2012
Appendix 2: FTSE 100 accounting risk measures
Largest service cost5
Company2011
Service cost £m2010
Service cost £m
Royal Dutch Shell 727 686
BP 612 492
Tesco 528 391
Royal Bank of Scotland Group6 483 566
Lloyds Banking Group 400 430
Barclays 371 111
Largest employer contributions
Company2011
Contributions £m2010
Contributions £m
Barclays 2,220 728
Royal Dutch Shell 1,436 1,341
BT Group 1,313 916
Royal Bank Of Scotland Group 1,059 832
BP 886 840
Lloyds Banking Group 833 648
5 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.
6 Royal Bank of Scotland Group’s service cost includes £53m of expenses (2010: £55m).
Largest increase in employer contributions
Company
2011Employer
contributions£m
2010Employer
contributions£m
Increase inEmployer
contributions£m
Barclays 2,220 728 1,492
BT Group 1,313 916 397
Royal Bank Of Scotland Group 1,059 832 227
Lloyds Banking Group 833 648 185
Marks & Spencer Group 260 83 177
AstraZeneca 458 304 154
LCP Accounting for Pensions 2012
Appendix 2: FTSE 100 accounting risk measures76
Largest employer contributions compared to service cost
CompanyContributions
£mService cost
£m
2011Contributions less service
cost £m
2010Contributions less service
cost £m
Barclays 2,220 371 1,849 616
BT Group 1,313 297 1,016 710
HSBC Holdings 727 1 726 1,768
Royal Dutch Shell 1,436 727 709 655
Royal Bank Of Scotland Group 1,059 483 576 266
GlaxoSmithKline 784 214 570 546
Highest equity allocation
Company
2011Equity allocation
%
2010Equity allocation
%
BP 68 72
Bunzl 65 63
Wolseley 63 65
British Land Company 63 62
Vodafone Group 62 60
BG Group 60 76
7 International Airlines Group did not pay a dividend in 2011 but contributed £503m to its pension scheme in 2011.
8 ITV and Wolseley did not pay a dividend during their 2010 accounting years.
Highest employer contributions compared to dividends paid7
CompanyContributions
£mDividends
£m
2011Contributions /Dividends %
2010Contributions /Dividends %
Royal Bank Of Scotland Group 1,059 40 2,648 20
Lloyds Banking Group 833 50 1,666 1,379
ITV 59 16 369 see note 8
Serco Group 105 37 281 250
BT Group 1,313 543 242 346
Wolseley 90 42 214 see note 8
77LCP Accounting for Pensions 2012
Appendix 2: FTSE 100 accounting risk measures
Lowest equity allocation
Company
2011Equity allocation
%
2010Equity allocation
%
Fresnillo 0 0
Prudential 5 10
Aviva 7 24
IMI 8 7
Rolls-Royce Group 11 18
G4S 12 19
Largest % increase in funding level
Company
2011Funding level
%
2010Funding level
%
Increase inFunding level
%
Accounting date
Next 112 90 22 Jan
Prudential 125 104 21 Dec
Experian 108 92 16 Mar
BT Group 95 82 13 Mar
Rolls-Royce Group 114 101 13 Dec
Centrica 108 95 13 Dec
Largest % decrease in funding level
Company
2011Funding level
%
2010Funding level
%
Decrease inFunding level
%
Accounting date
Capita Group 87 96 -9 Dec
BP 79 88 -9 Dec
Glencore International 55 63 -8 Dec
Fresnillo 76 83 -7 Dec
Standard Chartered 82 89 -7 Dec
Rio Tinto 74 80 -6 Dec
LCP Accounting for Pensions 2012
Appendix 2: FTSE 100 accounting risk measures78
Notes
Highest gain on assets9
Company2011
Gain %2010
Gain %
Standard Life 23 18
Rolls-Royce Group 22 12
HSBC Holdings 18 15
Resolution Limited 17 10
Aviva 16 11
Barclays 14 13
9 Figures calculated as a percentage of assets at the start of the accounting year (December year-ends only).
LCP Accounting for Pensions 2012
Bob Scott
Partnerbob.scott@lcp.uk.com
+44 (0)20 7439 2266
Nick Bunch
Partnernick.bunch@lcp.uk.com
+44 (0)20 7439 2266
Lane Clark & Peacock LLP
London, UK
Tel: +44 (0)20 7439 2266
enquiries@lcp.uk.com
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Zürich, Switzerland
Tel: +41 (0)43 817 73 00
info@libera.ch
Lane Clark & Peacock LLP
Winchester, UK
Tel: +44 (0)1962 870060
enquiries@lcp.uk.com
LCP Libera AG
Basel, Switzerland
Tel: +41 (0)61 205 74 00
info@libera.ch
Lane Clark & Peacock Belgium CVBA
Brussels, Belgium
Tel: +32 (0)2 761 45 45
info@lcpbe.com
LCP Asalis AG
Zürich, Switzerland
Tel: +41 (0)43 344 42 10
info@asalis.ch
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Dublin, Ireland
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enquiries@lcpireland.com
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info@lcpnl.com
UK
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