UK pensions. Our 21st annual survey looks at how FTSE 100

LCP ACCOUNTING FOR PENSIONS 2014

2014 has ushered in a new era for UK pensions. Our 21st annual survey looks at how FTSE 100 companies are managing their pension liabilities and highlights opportunities for the future.

2

For further information please contact Bob Scott, Nick Bunch or the partner

who normally advises you.

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

provided prominent acknowledgement of the source is given. 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 August 2014

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

Catriona Armstrong

Nick Bunch

Emma Colpus

Sophie Dapin

Laura Davies

Jeremy Dell

Catherine Drummond

David Everett

Charlie Finch

David Fink

Emma Ingham

Andrew Keenan

Holly Moffat

Simon Perera

David Poynton

Ella Purkiss

Charlotte Quarmby

Rebeccah Robinson

Max Root

Bob Scott

Natalie Stimpson

Alex Waite

Rachel Walton

Ken Willis

Charlotte Woods

Chris Wragg

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LCP Accounting for Pensions 2014

p4 Foreword

p6 1. Main findingsp8 1.1 Deficits persist

p8 1.2 Major longevity swap and

buy-in transactions

p8 1.3 Companies continue to seek alternatives

to straight cash funding

p8 1.4 The 2014 Budget – a retirement revolution

p9 1.5 Collective defined

contribution schemes?

p9 1.6 More companies move to DC schemes

p10 1.7 Pension contributions down,

despite auto-enrolment

p10 1.8 After a pause, the flight from

equities continues

p11 1.9 Further challenges and

opportunities lie ahead

p12 2. A remarkable year for pensionsp14 2.1 The March 2014 Budget

p17 2.2 The defined ambition project

p20 3. Summary of main findingsp22 3.1 Introduction

p22 3.2 FTSE 100 pension liabilities exceed half a

trillion pounds

p23 3.3 Pension scheme funding

p25 3.4 More reductions in DB pension

provision

p27 3.5 De-risking

p30 3.6 Challenges and opportunities on the

horizon

p34 4. Accounting standards p36 4.1 New version of IAS19

p36 4.2 Disclosures overhauled

p37 4.3 Tail wagging the dog?

p38 5. Analysis of pension disclosuresp40 5.1 Introduction

p40 5.2 Analysis of results

p46 5.3 Key assumptions

p54 Appendix 1 - FTSE 100 accounting

disclosure listing

p58 Appendix 2 - FTSE 100 accounting

risk measures

p63 Appendix 3 - Summary of disclosed

non-cash funding arrangements

3


Foreword4

In some ways the pensions outlook – for individuals as well as companies – is as bright as it has been for many years.

Bob ScottPARTNER, LCP

5LCP Accounting for Pensions 2014

Foreword

The past 12 months have seen wider

pension coverage as “auto-enrolment”

takes effect for medium sized companies.

However, most new entrants have joined

defined contribution (DC) arrangements

and many have had no more than the

statutory minimum contributions from

their employers. With pension taxation

becoming ever more complex and with

companies facing additional costs when

“contracting-out” ends in 2016 this trend

is likely to continue.

Our survey shows that, despite FTSE 100

companies pumping more than

£100 billion into their pension schemes

over the past five years, most schemes

still do not have enough money to cover

their pension liabilities.

Yet in some ways the pensions outlook –

for individuals as well as companies – is

as bright as it has been for many years.

Following the 2014 Budget, people will

no longer be forced to use their

retirement savings to purchase an

annuity. And this change could benefit

companies who sponsor defined benefit

(DB) schemes if retiring individuals

decide to cash in their DB benefits to

take account of the new flexibilities.

This year has seen “buy-in” and longevity

swap transactions at levels not previously

contemplated. Most recently, BT Group

announced it had implemented a

£16 billion longevity swap. And a few

months earlier, the ICI Pension Fund

completed a £3.6 billion buy-in of

pensioner liabilities.

Finally, this year also saw a fall in the

level of cash contributions to FTSE 100

pension schemes, with the number of

companies adopting innovative ways

of providing security to their pension

schemes increasing markedly.

38 FTSE 100 companies disclosed some

form of security arrangement in their

2013 accounts.

So we see that members of pension

schemes can be better served whilst

companies find that their pension

scheme is less of a burden.

We hope that you find our analysis of

recent accounts useful and that, as we

go through 2014 and towards a general

election next year, things continue to

look up for the pensions industry as a

whole.

Fore

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Welcome to our 21st annual survey of FTSE 100 companies’ pension disclosures.

Bob Scott

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Contentp6 1. Main findingsp8 1.1 Deficits persist

p8 1.2 Major longevity swap and

buy-in transactions

p8 1.3 Companies continue to seek

alternatives to straight cash

funding

p8 1.4 The 2014 Budget – a

retirement revolution

p9 1.5 Collective defined

contribution schemes?

p9 1.6 More companies move to DC

schemes

p10 1.7 Pension contributions down,

despite auto-enrolment

p10 1.8 After a pause, the flight from

equities continues

p11 1.9 Further challenges and

opportunities lie ahead

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FTSE 100 pension contributions fell by £1.7bn in 2013 as a growing number of companies made use of alternative funding methods. 38 companies disclosed such arrangements in their 2013 accounts.

Bob Scott

Partner LCP

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Employer contributions to pension schemes

Deficit contributions (DB schemes)

Employer service cost (DB schemes)

Employer DC costs


1. Main findings8

1.1 Deficits persist � We estimate that at the end of June 2014 the total UK IAS19 pension

deficit for FTSE 100 companies was £37 billion, compared to £43 billion

a year earlier.

� This reflects total assets of £475 billion, which represent about 93% of

liabilities valued at £512 billion.

1.2 Major longevity swap and buy-in transactions � Several companies have hedged some or all of their pension risk through

insurance contracts during the last year. For example, InterContinental Hotels Group insured all of its pension liabilities in July 2013 and the

ground breaking £3.6 billion ICI Pension Fund buy-in transaction has

demonstrated the market's capacity to undertake much larger buy-in

transactions than we have seen in the past.

� In March 2014 Aviva entered into a (then) record-breaking swap that

hedges longevity risk for around £5 billion of pension liabilities. In

July 2014 this was surpassed by BT Group announcing that it has

removed 25% of its longevity risk by setting up its own insurance

company and reinsuring the risk for liabilities valued at £16 billion.

1.3 Companies continue to seek alternatives to straight cash funding � Around 1 in 5 of the FTSE 100 companies that sponsor DB pension

schemes, including Capita and Johnson Matthey, have now disclosed

having put in place an asset backed contribution arrangement to fund

their pension scheme.

� These arrangements can provide additional security to the pension

scheme whilst avoiding the risk of a trapped surplus for the employer.

� Other companies have provided security in different ways. For example,

International Airlines Group has provided its pension schemes with

security over aircraft and Whitbread has provided security over

property.

1.4 The 2014 Budget – a retirement revolution � On 19 March 2014 George Osborne introduced major changes to the UK

pension system that have been hailed as the biggest reforms in nearly a

century.

� The main policy change – full flexibility in how pension savings built up

in DC pension plans are drawn – marks a major shift from the position

that has applied since 1921, when annuitisation was introduced as a

requirement to receive generous tax relief on pension savings.

� Already there is evidence that this has encouraged greater pensions

saving as individuals no longer perceive a pension plan as inflexible and

poor value.

20%The proportion of FTSE

100 companies with an

asset backed contribution

arrangement in place.


1. Main findings

� The change is also likely to impact DB schemes as we expect to see an

increase in the number of retiring members transferring their benefits to

a DC scheme in order to take advantage of the new flexibilities.

� This will potentially reduce company pension liabilities and, over time,

may increase the number of schemes that can be bought out with an

insurance company.

� Several commentators have expressed concern that individuals will not

be able to manage their finances under the new regime. Some have

suggested that people will underestimate how long they will live and so

are likely to run out of money. Others have pointed to the high cost of

care in old age.

� To address this, the government has committed to providing free

guidance for all DC pension scheme members at the point of retirement.

� Determining exactly how this will work is one of the biggest challenges

the coalition faces before the election next year.

1.5 Collective defined contribution schemes? � A further change to the UK pension system announced in the Queen’s

speech on 4 June was that employers will be able to establish collective

pension schemes where investment (and other) risks are pooled across

the membership.

� Similar schemes have operated successfully in the Netherlands and

Denmark.

� With many UK companies having recently undertaken auto-enrolment

exercises, we are unlikely to see widespread adoption of such schemes

in the UK in the foreseeable future.

� However, this legislation does signify the government’s recognition that

collective schemes have a role to play in pension provision. Perhaps,

over time, we will see a reversal of the trend which, for many years, has

been away from collective provision.

1.6 More companies move to DC schemes � Nevertheless, for now, the trend is still away from collective schemes and

towards DC arrangements where there is no pooling of risks.

� During 2013 GKN closed its “hybrid” pension scheme – which offers a

combination of DB and DC benefits – to new recruits. This leaves only

four FTSE 100 companies providing any form of DB pension provision to

new employees.

� In addition, four more companies, BG Group, InterContinental Hotels Group, Sainsbury’s and Wolseley closed their DB pension schemes to

future benefit accrual. A further three companies, including HSBC and

Severn Trent, have reached agreement to do the same in the near future.

4FTSE 100 companies

providing any form of DB

pension provision to new

employees.

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1. Main findings10

� However, all large employers are now required to automatically enrol

employees into a work-based pension scheme. Whilst membership of

DB schemes has been declining, membership of DC pension schemes

has been increasing rapidly.

� Scottish & Southern Energy reports an employee participation rate in

its DC scheme of over 90% and Travis Perkins has said that only 2% of

employees have opted out of its pension arrangements.

� As a result, significantly greater numbers of employees are now

members of workplace pension schemes. The next challenge will be to

find ways of encouraging (or compelling) employers and employees to

pay contributions at a level sufficient to provide members with decent

outcomes in retirement.

1.7 Pension contributions down, despite auto-enrolment � This year has seen total pension contributions paid by FTSE 100

employers fall from £21.9 billion in 2012 to £20.2 billion in 2013.

� The decrease is largely due to a significant reduction in deficit

contributions for a small number of companies, such as BT Group, BAE Systems and Barclays that made very large contributions in previous

years.

� However, it also reflects the lower value of benefits currently being

provided to employees through DC schemes than were previously

provided in DB schemes.

1.8 After a pause, the flight from equities continues � Last year we saw an overall increase in the proportion of pension scheme

assets invested in equities. However, the long-term trend of switching

into assets that more closely match pension liabilities has been seen

again this year with a modest reduction in the overall equity allocation.

� A few companies made more significant changes to their pension

scheme investments during 2013 – for example, BG Group moved 23%

of its pension scheme assets from equities to bonds. Going against the

general trend, G4S increased its pension scheme’s allocation to equities

from 15% to 26%.

� Many companies, such as Bunzl and Rexam, have disclosed that they

have pre-agreed “triggers” in place with their pension schemes, with

assets automatically being switched from equities to bonds as the

funding level increases. We can therefore expect to see a continued

movement out of equities and into bonds in future years, as and when

funding positions improve.

£20.2bnof company pension

contributions in 2013, down

from £21.9 bn in 2012.


1. Main findings

1.9 Further challenges and opportunities lie ahead Inflation measures � In November 2013 a new measure of inflation, RPIJ – which is

systematically lower than conventional RPI inflation – was granted the

status of "National Statistic".

� This increases the opportunity for companies to consider which measure

of inflation should be used in their pension schemes – and the potential

savings from making a change.

Scottish independence � Scottish independence could cause a pensions headache for some

companies.

� A "yes" vote on 18 September could result in pension schemes

operating "cross border" and being subject to more stringent funding

requirements.

� In addition, the attractiveness of Scottish Limited Partnerships, used for

most asset backed contribution arrangements, could reduce.

Pension taxation � Should we have a new government following next year’s general election

we could see further changes to pension scheme taxation.

� We wait to see what the various parties put in their manifestos but, over

recent months:

– Spokesmen for the Labour party have proposed that tax relief on

pension contributions should be limited to 20% and that the Annual

Allowance should be reduced from £40,000 to the level of national

average earnings (about £26,000).

– The Liberal Democrats have proposed that the Lifetime Allowance

– the maximum value of pension savings that can be made without

incurring additional tax charges – should be reduced from £1.25 million

to £1 million.

– Separately Steve Webb has indicated that he would like to see a

uniform level of pension tax relief – perhaps 30%.

Legislative changes � The ability to contract out of the state pension system comes to an end

in 2016. This will result in higher national insurance contributions for the

majority of employers that continue to provide a DB pension scheme

to their employees. This may result in further levelling down of pension

provision and more closures of schemes to future accrual.

� With a new European pension directive in the pipeline, UK schemes

could be subject to much more onerous governance and reporting

requirements in coming years.

2016The ability to contract out

of the state pension system

comes to an end.

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Contentp12 2. A remarkable year for pensionsp14 2.1 The March 2014 Budget

p17 2.2 The defined ambition project

No caps. No drawdown limits. Let me be clear: no one will have to buy an annuity.

George Osborne

19 March 2014

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2. A remarkable year for pensions14

2. A remarkable year for pensionsGiven the volume of legislative and regulatory change already seen since

2010, companies might have hoped for some respite. Nevertheless, the

past 12 months have seen further significant changes and developments,

including:

� the elevation of RPIJ to the status of National Statistic;

� material risk transfers including the £3.6 billion ICI Pension Fund buy-in

and the £16 billion longevity swap by BT Group;

� a new funding code of practice;

� legislation enabling collective defined contribution schemes; and

� a proposal for a new European pensions directive.

We discuss these below and in greater detail in the following sections.

2.1 The March 2014 BudgetThe biggest single event in the past 12 months – possibly even in the

past 100 years – was George Osborne’s 19 March Budget. At a stroke, he

managed to deliver:

� a popular Budget which gives people the freedom to choose what they

do with their retirement savings;

� a boost to the pensions industry by making pension savings more

attractive; and

� a solution to the “annuity issue” which had been rumbling on for some

time.

All this with the prospect of accelerated payments to the Treasury if

people take their retirement savings as cash and therefore pay tax on the

proceeds.

No more compulsory annuitiesThe main policy change – full flexibility in how pension savings built up in

DC pension plans are drawn, marks a major shift from the position that has

applied since 1921, when annuitisation was introduced as a requirement to

receive generous tax relief on pension savings.

Whilst annuities will not disappear completely, it is uncertain how widely

they will be used in future. Evidence from overseas suggests that

relatively few individuals will continue to purchase annuities.


2. A remarkable year for pensions

The requirement to purchase an annuity was at odds with many other

developed countries – such as the US and Australia – where individuals are

able to take their pension pot in full as cash. As a result the UK had the

largest annuity market in the world, with some statistics indicating that

over half of worldwide annuities are purchased here.

Insurers who saw their captive market shrinking materially overnight were

therefore hit particularly hard by the Budget announcements.

Variable retirement incomeThe Budget changes could, therefore, mark a turning point in how later

life is viewed. The concept of a single point of retirement, with a steady

income thereafter, may well become outdated.

Instead, we may see individuals making a gradual transition into full

retirement, whereby they steadily decrease the number of hours worked,

and use their pension pot to top up their income. In the middle years of

retirement, the individual’s income needs may well fall before rising again

due to care costs in old age.

Accessing pension savingsThe government has confirmed that members of DB schemes will be able

to benefit from the new flexibilities – albeit they may have to transfer to a

DC scheme to do so.

This is to be welcomed as restricting transfers from DB schemes – and

so denying DB scheme members the flexibility available to DC members

– would have introduced an unnecessary divide between those in DB

schemes and those in DC schemes.

Impact on DB schemesFor sponsors of DB pension schemes, the Budget changes raise the

possibility that certain members may want, or can be encouraged, to

transfer to a DC scheme. This could result in a significant change in the

profile of the scheme’s liabilities.

Most transfers are likely to take place close to retirement, as there seems

little reason for an individual to take on investment risk prior to retirement

by transferring at a younger age. However, where there is concern about

the ongoing viability of a pension scheme, and there is a risk that it will

end up in the Pension Protection Fund with lower levels of compensation

being provided, we can expect to see increased numbers of transfers at all

ages.

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2. A remarkable year for pensions16

The charts below illustrate:

1. The typical profile of benefit payments from a pension scheme prior to

the March Budget announcements; and

2. The possible revised profile of benefit payments if half of the members

take a transfer value at retirement.

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Active

Deferred

Pensioner

Existing typical DB cashflow “shape”

2015 2030 2045 2060 2075 2090

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Deferred

Pensioner

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Possible DB cashflow “shape” following March Budget

2015 2030 2045 2060 2075 2090

If transfers occurred at these levels, companies would need to consider the

impact on their scheme’s investment strategy – for example, in relation to

liquidity requirements – as payments would be accelerated.

It would also have an impact on funding strategy as, under current

legislation, the payment of a transfer value generally improves a scheme’s

funding position.


2. A remarkable year for pensions

The guidance guaranteeSome commentators have expressed concern that individuals may run out

of income in old age – either because they spend their whole pension pot

as soon as possible, or because they underestimate how long they will live

and how much money they will need in later life.

To address these concerns, George Osborne announced that everyone

who retires with a DC pension will be offered “free, impartial, face-to-face

advice”. This has since been relabelled as “guidance” and the government

has stated it may not be “face-to-face”, but nonetheless it will be no

simple task to provide guidance to as many as 400,000 people each year.

Putting everything in place before April 2015 – when the changes come

fully into force – is one of the biggest challenges the coalition faces before

the election next year.

2.2 The defined ambition projectLegislation to enable collective DC schemes – and other defined ambition

pensions – is currently contained within the Pension Schemes Bill before

Parliament. However, many people feel that the government has missed

the opportunity to make defined ambition schemes a reality.

One option already available to companies that want to provide retirement

benefits with more risk sharing than DC schemes is to set up a “cash

balance” pension scheme.

Under this type of scheme employees accrue a cash pot at retirement,

based on the level of their salary and length of employment. Pre-

retirement investment risk is therefore retained by the employer, with the

employee taking on all post retirement risk.

Prior to the Budget announcements the main downside of a cash balance

scheme was the employees’ risk that annuities would be particularly

expensive at the point of retirement. However, with the new flexibilities

meaning that pension pots can be taken as cash this is now much less of

an issue. Johnson Matthey, Morrisons and Diageo all currently have cash

balance schemes which are open to new employees.

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It's been a remarkable year for pensions.

21 July 2014Announcement that transfer values from private sector

DB schemes to DC schemes can continue to proceed

4 July 2014BT Group announces that it has removed £16 billion of

longevity risk

10 June 2014The Pensions Regulator issues a new code of practice

on scheme funding

4 June 2014Announcement in Queen’s speech that the government

will legislate for collective defined contribution pensions

29 May 2014PPF issues consultation on the next triennium of levies

– running from 2015/16 to 2017/18

4 April 2014High Court rules against IBM in scheme closure case

27 March 2014Proposal for new European pension directive published

26 March 2014The ICI Pension Fund announces that it has insured

£3.6 billion of liabilities with Legal & General and Prudential

19 March 2014March 2014 Budget

6 March 2014Aviva enters into a £5 billion longevity swap

21 November 2013The Pensions Regulator issues a new code of practice

relating to the governance of occupational DC pensions

21 November 2013RPIJ and CPIH inflation indices are designated

“National Statistics”

19 November 2013The Pensions Regulator issues guidance on asset

backed contributions

2014

2013

Amid concerns that too much value is being placed on asset backed

contributions, the Regulator sets out the standards it expects of

pension trustees when entering into these arrangements

The Regulator continues to increase its focus on DC

issues, given the large number of individuals now being

auto-enrolled into these schemes

Fundamental changes to the UK pensions landscape are announced by George Osborne

Whilst more stringent funding requirements are off the table for

the time being, this could introduce significant new governance

and disclosure requirements for UK pension schemes

Some schemes will see a significant increase in the level

of their PPF levies following the change in insolvency risk

provider from Dun & Bradstreet to Experian

A more employer friendly version of the code reflecting

the Regulator’s new statutory objective to “minimise any

adverse impact on the sustainable growth of an employer”

The elevation in status of these inflation indices increases

the potential for companies to consider changes to the

level of indexation in their pension schemes

Brokered directly with the reinsurance market,

this marks a major increase in the size of longevity

swaps taken out by pension schemes

This represents a significant increase in the size of

transaction undertaken in the buy-in/buy-out market

IBM is held to have breached its duty of good faith

to its employees when closing its pension schemes to

future accrual in 2011

With discontent over this type of pension scheme in

the Netherlands, and new flexibilities for existing DC

schemes, questions remain over the level of take up

Another massive increase in the amount of

longevity risk removed by a pension scheme, with

a new insurance company set up in order to have

direct access to reinsurance markets

18

The most significant change to UK pensions in almost a century.

Bob Scott

Partner LCP

19

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Contentp20 3. Summary of main findingsp22 3.1 Introduction

p22 3.2 FTSE 100 pension liabilities

exceed half a trillion pounds

p23 3.3 Pension scheme funding

p25 3.4 More reductions in DB pension

provision

p27 3.5 De-risking

p30 3.6 Challenges and opportunities

on the horizon

As scheme closures continue, only 4 FTSE 100 companies disclosed any form of DB pension for new employees.

Bob Scott

Partner LCP

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Type of pension benefit provided for existing employees of FTSE 100 companies

No UK DB scheme

DB scheme closed to accrual

DB scheme - final salary, with cap on salary increases

DB scheme - final salary, no cap on salary increases

DB scheme - non final salary

14

23

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38

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3. Summary of main findings22

3. Summary of main findings

3.1 IntroductionThe following sections provide an insight into the disclosure of pension

scheme costs in companies’ 2013 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 scrutinisedAll of 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.

Of the companies in the FTSE 100 at the end of 2013, 89 sponsored at

least one material DB scheme, either in the UK or overseas. The remaining

11 companies provide DC pensions and have no legacy DB scheme on their

balance sheet.

3.2 FTSE 100 pension liabilities exceed half a trillion poundsWe estimate that the combined FTSE 100 pension deficit in respect of UK

liabilities was £37 billion at the end of June 2014, reflecting total IAS19

liabilities of £512 billion against assets of £475 billion.

Strong investment returns over the year to June 2014 – particularly on

equities – have increased asset values, although this has been largely

offset by an increase in IAS19 liabilities resulting from a fall in corporate

bond yields.

The chart on the following page shows how the accounting deficit has

developed over the past five years. Our figures include unfunded pension

promises but exclude, where possible, the overseas pension schemes

sponsored by FTSE 100 companies and any employee benefits other than

pensions.

£37bnThe combined accounting

deficit for FTSE 100

companies at the end of

June 2014.



Estimated IAS19 position for UK schemes of FTSE 100 companies

-100

-80

-60

-40

-20

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The highest level of cover disclosed during 2013 was 133% for Royal Mail, which entered the FTSE 100 in December 2013 following privatisation.

Royal Mail previously had one of the largest pension schemes in the UK, with

a significant deficit. But after the European Commission approved the use of

state aid in March 2012, the majority of its pension liabilities – and the entire

pension deficit – was transferred to a new government pension scheme.

As noted below, the surplus increased by a further £1.35 billion in

September 2013 following an agreement to increase accrued pensions in

line with RPI inflation rather than salaries. This has taken the IAS19 funding

level up to 183% at 31 March 2014.

3.3 Pension scheme fundingContributions to DB schemes totalled £14.8 billion, of which we estimate

that £7.6 billion went towards removing deficits rather than towards the

cost of additional benefit accrual for current employees.

The highest level of DB contributions during the year was £1.65 billion paid

by Royal Dutch Shell. This was the only company to pay over £1 billion

this year – in 2012 two other companies – BAE Systems and BT Group –

also paid more than £1 billion into their pension schemes.

Five companies – International Airlines Group, Lloyds Banking Group,

RBS, Royal Mail and Sports Direct – paid more to their pension schemes

during their 2013 accounting year than they paid in dividends to

shareholders.

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183%The funding level of the

Royal Mail pension scheme at

the end of March 2014.



The chart below shows how company payments into pension schemes

have changed since 2007.

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Employer contributions to pension schemes

Deficit contributions (DB schemes)

Employer service cost (DB schemes)

Employer DC costs

This year the total pension contributions paid by FTSE 100 companies

reduced from £21.9 billion to £20.2 billion.

In particular, contributions to DB schemes have reduced from £16.8 billion

in 2012 to £14.8 billion in 2013. This largely reflects a significant reduction

in deficit contributions for a small number of companies, such as

BT Group, BAE Systems and Barclays that made very large contributions

in the previous year.

Payments to DC pension schemes are likely to increase further in coming

years as companies continue to close their DB schemes and the minimum

required contributions under the auto-enrolment regime are increased

over the period to 2018.

Non-cash fundingIncreased use of alternate funding methods and security arrangements

may be one reason for the decrease in cash contributions to DB pension

schemes. These can take various forms, including:

� Asset backed contribution arrangements. Usually the company transfers

assets to a Scottish Limited Partnership which then provides income to

the scheme and recourse to the underlying assets in certain pre-defined

circumstances.

� A charge over specific company assets.

� A pledge of additional funding in certain circumstances (for example,

following a disposal or when profits exceed a certain level).

� A parent company or intra-group guarantee.



� Payment of contributions to an escrow account under which funds pass

to the scheme in certain pre-defined circumstances.

We have set out a summary of those companies who reported some form

of contingent funding arrangement in appendix 3.

The Pensions Regulator’s viewsGiven the increased use of asset backed contributions, the Pensions

Regulator felt it necessary to issue guidance on these arrangements

in November 2013. Whilst the Regulator has not approved the use of

asset backed contribution arrangements, it recognises that this sort

of innovative funding arrangement can be beneficial to both pension

schemes and employers.

However, the Regulator has expressed concern over the risk that these

arrangements could be found to be in breach of employer related

investment limits and has said that a backup funding plan should be put

in place in case the arrangement subsequently has to be unwound. This,

combined with the PPF’s proposal that only asset backed contributions

secured on UK property will be allowable for PPF levy purposes, could

reduce the attractiveness of certain arrangements to FTSE 100 companies.

3.4 More reductions in DB pension provisionThere are currently no FTSE 100 companies that provide traditional final

salary pensions to new employees. GKN provided a “hybrid” pension

scheme – offering a combination of DB and DC benefits – to new entrants

but closed this to new entrants during 2013.

This leaves only 4 FTSE 100 companies disclosing any form of DB pension

provision to new employees – Diageo, Johnson Matthey and Morrisons,

which provide cash balance schemes, and Tesco, which provides a career

average revalued earnings (CARE) scheme.

Several companies took one step further and closed their scheme to all

future accrual during 2013:

� BG Group closed to accrual on 31 December 2013 and as a result

disclosed a $154 million gain in its 2013 accounts.

� InterContinental Hotels Group closed its scheme from 1 July 2013.

� Sainsbury’s closed its scheme to future accrual in September 2013,

resulting in a gain of £172 million.

� Wolseley closed its UK pension scheme to accrual at the end of 2013.

In addition, HSBC, Severn Trent and Weir Group have all reached

agreement to close their pension schemes to future accrual in 2015.

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At the same time, companies are making changes that reduce the

employer cost of their remaining DB pensions:

� Lloyds Banking Group previously limited increases in pensionable pay

to 2% per annum in 2010, but has now decided to freeze increases to

pensionable pay completely from April 2014. It has been reported that

this will result in a gain of £1 billion being disclosed in its December 2014

accounts.

� Johnson Matthey has increased employee contributions for those who

remain in its CARE scheme.

� National Grid has capped increases in pensionable salary to the lower of

RPI inflation and 3% per annum.

� Royal Mail reached agreement to increase accrued pensions in line with

RPI inflation (up to a maximum 5%) rather than in line with salaries.

This resulted in a £1.35 billion gain, taking the IAS19 funding level of its

pension scheme up to 183% at 31 March 2014.

The chart below shows the numbers of companies providing any

continuing DB pension provision after allowing for the changes listed

above.

Type of pension benefit provided for existing employees of FTSE 100 companies

No UK DB scheme

DB scheme closed to accrual

DB scheme - final salary, with cap on salary increases

DB scheme - final salary, no cap on salary increases

DB scheme - non final salary

14

23

11

38

14

With auto enrolment requirements now applying for all large companies,

membership of DC schemes is on the increase. Sainsbury’s disclosed

that it has auto-enrolled 57,000 employees into its DC scheme with an

opt-out rate of only 6%. Similarly, Scottish & Southern Energy reported

a participation rate in its pension scheme of over 90% and Travis Perkins

had only a 2% opt-out rate following the auto-enrolment of 9,200

employees into its pension scheme.



Nevertheless, enrolling individuals in a pension scheme is only the first

stage. Even once all companies have completed auto-enrolment, the

minimum required level of contributions (8% of relevant earnings) is not

sufficient to provide a decent outcome in retirement. The next challenge

will be to find ways of encouraging (or compelling) employers and

employees to pay contributions at a level sufficient to provide members

with meaningful levels of retirement income.

Auto-escalation of employee contributions – which has worked well in the

United States – might be one way of addressing this. This would involve

automatically increasing an employee’s rate of pension contribution

whenever a salary increase is granted.

Although the employee would be able to opt out of paying the increased

level of contributions, inertia is likely to mean that many will continue

paying the higher rate, particularly as the increase in salary would avoid

any fall in take home pay.

3.5 De-riskingAs pension schemes mature and the time horizon for payment of benefits

decreases, companies and pension scheme trustees have typically looked

to reduce the risks posed by the pension scheme.

Last year we saw an overall increase in the allocation of assets to equities.

This year, the general trend has been restored with a modest movement

of assets out of equities and into bonds and other asset classes. This is in

the context of a period when equities significantly outperformed bonds,

and so if no rebalancing had been undertaken, the equity allocation would

have increased by around 4%.

December 2013 December 2012

Equities33.2%

Bonds43.3%

Other 23.5% Equities

34.5%

Bonds42.5%

Other23.0%

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33%The overall proportion of

pension scheme assets

invested in equities.



Some companies made significant changes to their schemes’ investment

strategies during 2013 – for example, BG Group moved 23% of its pension

scheme assets from equities to bonds and Babcock undertook a hedging

programme which resulted in a 17% reduction in its schemes’ allocation to

equities.

However, not all pension schemes reduced their exposure to equities

during the year. G4S states that the asset strategy for its UK pension

schemes is managed dynamically rather than against a fixed asset

allocation. During 2013 the proportion of assets held in bonds in its

UK pension schemes decreased from 22% to 4%, with the allocation to

equities increasing from 15% to 26%.

As part of the new disclosure rules under the revised version of the

international accounting standard IAS19, companies are required to

provide increased detail on their pension schemes’ investment strategies.

Several companies, such as Bunzl, GlencoreXstrata, Meggitt and Rexam,

have disclosed that pre-agreed investment triggers have been put in place,

under which assets will be switched from equities to bonds when the

scheme’s funding level improves.

This type of mechanism potentially enables schemes to de-risk without

any additional contributions being required from the sponsoring employer.

Given the relatively wide-spread use of such triggers we can expect to see

further moves out of equities in future years as and when equity markets

rise and funding levels improve.

Many companies have also looked to remove other risks within their

pension schemes. Longevity risk – the risk that pension scheme members

live longer than expected (and therefore the cost of providing their

pension is higher than expected) – can be removed by entering into a

“longevity swap” or buy-in with an insurance company. Under a longevity

swap the counterparty would make payments to the pension scheme if

individuals live longer than anticipated. An increasing number of FTSE 100

companies have taken out this type of contract:

� AstraZeneca reports that its pension scheme entered into a longevity

swap during 2013 to hedge against the longevity risk in respect of around

10,000 pensioners, which covers $3.8 billion of the scheme’s liabilities.

� In March 2014 one of Aviva’s pension schemes entered into a longevity

swap covering approximately £5 billion of pensioner liabilities.

� BAE Systems reports that one of its main pension schemes entered

into an arrangement to insure longevity risk for its current pensioner

population, covering £2.7 billion of pension scheme liabilities. This

was followed in December 2013 with similar contracts for two of the

company’s other pension schemes, covering £0.9 billion and £0.8 billion

of pension scheme liabilities in each case.

8FTSE 100 companies that

have now entered into a

longevity swap.



Babcock, International Airlines Group, ITV and Rolls-Royce have all

previously disclosed entering into longevity swaps. In July 2014 BT Group announced that it has removed the longevity risk applying for £16 billion

of pension liabilities by setting up its own insurance company and then

reinsuring the risk.

We have also seen a number of companies purchasing “buy-in” contracts,

under which the risks relating to a section of their pension scheme

liabilities – including longevity risk – are hedged by an insurance company:

� GKN disclosed that a £123 million buy-in was completed in early 2014.

� Following the closure of its pension scheme to future accrual in July

2013, InterContinental Hotels Group completed a buy-in transaction in

August which covers all of its pension scheme liabilities.

� Resolution reports that it has purchased an additional tranche of buy-in

contracts covering benefits for pensions in payment up to 30 June 2013.

� Smith & Nephew purchased an insurance contract to cover a subset of

the pensioner liabilities in its UK pension scheme.

� In September 2013 Smiths Group invested around £160 million in

annuities to match specific liabilities of one of its UK pension schemes.

� Tate & Lyle reports that in December 2012 the trustee of its main UK

pension scheme agreed a £347 million partial pensioner buy-in, covering

approximately 43% of the scheme’s pensioner liabilities. In its 2014

accounts, it discloses that one of its smaller pension schemes agreed a

buy-in for £82 million in September 2013, covering all of its liabilities.

The chart below shows how pensioner buy-in pricing has changed in recent

years compared to the cost of holding gilts to meet pension liabilities.

December 2007

June 2008

December 2008

June 2009

December 2009

June 2010

December 2010

June 2011

December 2011

June 2012

December 2012

June 2013

December 2013

Pre-bankingcrisis

Bankingcrisis Early quantitative easing Return to economic growthEurozone uncertainties

Val

ue o

f g

ilts

rela

tive

to

buy

-in

pri

ce

Buy-inpricing lessfavourablethan gilt

valuations

Buy-in pricing morefavourablethan gilt

valuations

Source: LCP analysis of the relative value of gilts against pensioner buy-in prices based on middle-of-the-road longevity assumptions for a UK pension plan. Buy-in pricing depends on a range of factors such as transaction size, benefit structure, membership profile and insurer appetite.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

How buy-in pricing has changed in recent years compared to the cost of holding gilts

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Pensioner buy-in pricing remains relatively attractive at the current time

– allowing longevity risk to be transferred at little or no cost compared to

holding gilts – and this is reflected in the number and size of transactions

seen in the last year.

A growing pool of global reinsurers has significantly increased capacity for

buy-ins and longevity swaps in recent years. The UK is seen as the leading

market for longevity risk transfers and that has attracted a number of

overseas participants.

In addition, with UK-based insurers looking to make up for the decline

in individual annuity sales following the March Budget announcements,

additional competitiveness is likely to keep pricing keen for longevity risk

transfers in coming months.

3.6 Challenges and opportunities on the horizonLooking forward there are plenty of challenges – and also opportunities –

for companies sponsoring DB pension schemes.

A new inflation measure – RPIJThree years ago many companies looked at whether CPI inflation – which

had replaced RPI as the measure of inflation applying for statutory

increases to pensions – should apply for increases granted in their pension

scheme.

With RPIJ being granted the status of "National Statistic" by the UK

Statistics Authority in November 2013, we understand that a number of

companies are again looking at the measure of inflation their pension

schemes use.

Due to the way the indices are constructed, increases in RPIJ are expected

to be consistently lower than increases in RPI – with an average expected

difference in the region of 0.7% pa. Therefore, to the extent that schemes

can switch to RPIJ, employers would benefit from an immediate reduction

in pension cost – albeit at the expense of pension scheme members who

would be left with lower expected future pensions.

If all of the FTSE 100 companies that still use RPI inflation in their pension

schemes were to move to using RPIJ, then we estimate that the combined

pension deficit could fall by up to £20 billion.

Scottish independence?On 18 September Scottish residents will vote on whether Scotland should

separate from the rest of the UK and become an independent country.

£20bnThe potential impact of

adopting RPIJ inflation.



If the referendum produces a "yes" result then there will be many

transitional issues that need to be addressed, including those relating to

pensions.

At present a pension scheme that operates across more than one EU state

has to register as “cross-border” and is subject to much more stringent

funding requirements than apply for schemes operating solely within the

UK. In particular, cross-border schemes must carry out annual actuarial

valuations and there is a requirement to be fully funded at all times.

This extra burden means that there are currently very few cross-border

schemes within the EU, with the majority operating between the UK and

Ireland. However, if Scottish independence goes ahead, and Scotland

becomes a new member of the EU, then the number of cross-border

schemes can be expected to increase dramatically, with many of those run

by FTSE 100 companies affected.

Scottish independence could also affect the attractiveness of Scottish

Limited Partnerships, which underlie the asset backed contribution

arrangements used by an increasing number of FTSE 100 companies.

PPF leviesThe PPF is currently consulting on the structure of its levies for the three

year period from 2015/16 to 2017/18. One major change is the replacement

of Dun & Bradstreet with Experian as the PPF’s insolvency risk provider.

Differences in the way in which the likelihood of a sponsoring employer’s

insolvency is assessed could result in significant changes to schemes’ PPF

levies. The PPF has suggested that the changes will generally be good

news for manufacturing and finance companies, but bad news for service

and not-for-profit organisations.

For some companies current PPF levies are significant – for example, International Airlines Group disclosed that costs in relation to PPF levies

were €6 million during 2013.

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Further tax changes?With a general election on the horizon there is the potential for more

changes to the taxation applying on pension savings. The table below

illustrates the changes that have already been made since the current

regime – originally known as “tax simplification” – came into force in 2006.

Date Change

April 2006 New taxation regime comes into force

A new Lifetime Allowance – the maximum amount of total pension

savings that can be made without additional taxation – applies

and is set at £1.5 million. A new Annual Allowance – the maximum

amount of pension savings that can be made in one year without

additional taxation – applies and is set at £215,000

April 2009 Cuts in Annual Allowance and Lifetime Allowance from 2011

announced with immediate anti-forestalling rules impacting anyone

earning over £150,000 pa

December 2009 Anti-forestalling rules extended to anyone earning over £130,000 pa

April 2010 With inflationary increases the Lifetime Allowance reaches a peak of

£1.8 million and the Annual Allowance reaches a peak of £255,000

April 2011 Annual Allowance slashed to £50,000. With a sharp increase in the

number of individuals in DB schemes – including many on moderate

earnings – that face annual tax bills, the government introduces a

facility for pension schemes to pay tax on their members’ behalf in

return for a reduction in scheme pension (known as “scheme pays”).

April 2012 Lifetime Allowance reduced to £1.5 million

April 2014 Lifetime Allowance reduced to £1.25 million and Annual Allowance

reduced to £40,000

Further changes to the pension taxation system may be inevitable

regardless of which party is in power at the end of next year.

In March 2014 Labour announced a policy of limiting tax relief on pension

contributions made by high earners to 20%. This would effectively result

in double taxation of pension contributions, with those earning over

£150,000 being taxed at 25% on earnings paid into a pension scheme,

with the resulting pension then subject to income tax again when this is

drawn in retirement. Labour is also considering removing the existing

right for individuals to take 25% of their pension pot tax free and has

indicated an intention to reduce the Annual Allowance to the level of

National Average Earnings.



The Liberal Democrats have proposed reducing the Lifetime Allowance to

£1 million. Separately, Steve Webb has indicated that he would like to see a

uniform level of pension tax relief set between 20% and 30%.

All of these measures would be complex to introduce and would further

increase the number of individuals subject to additional taxation on their

pension savings. As a result, they may reverse some of the benefits of the

March Budget changes and deter individuals (and their employers) from

providing adequately for their retirement.

The end of contracting outThe ability to contract out of the state pension system finally comes to an

end in 2016. This will result in higher national insurance contributions for

the majority of employers that continue to provide DB pensions to their

employees, as the rebate they currently receive will disappear. The value

of this annual rebate is dependent on earnings but can be worth over

£1,000 per employee.

In order to compensate for this additional cost employers are able to

reduce the level of benefits provided or increase members’ contributions,

but this will introduce administrative complexity. Instead we are likely to

see many employers using the end of contracting out as a reason to close

their pension scheme to future accrual.

More European legislationOn 27 March 2014 the European Commission put forward a new proposed

pension directive. As a result of lobbying from the UK and other affected

EU member states the stringent funding requirements that had previously

been put forward have been removed, and so the new directive focuses

solely on governance and reporting requirements.

The directive is intended to come into force in 2017 and is likely to require

an increase in standards of governance and disclosure, as it brings

pension scheme requirements in these areas more into line with those

applying for insurance companies. Schemes will be required to have a risk

management function, an internal audit function, and will need to provide

prescribed information to all of their members each year.

The costs associated with the new requirements are expected to be

significant and may encourage employers to wind up legacy DB pension

schemes.

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34

Contentp34 4. Accounting standards p36 4.1 New version of IAS19

p36 4.2 Disclosures overhauled

p37 4.3 Tail wagging the dog?

The new IAS19 accounting standard has increased the level of detail disclosed in relation to investment strategies.

Nick Bunch

Partner LCP

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4. Accounting standards36

4. Accounting standards

4.1 New version of IAS19 For the first time in 2013 companies must report their results under a

revised version of the international pensions accounting standard IAS19. In

particular, two changes that we have flagged in previous surveys have now

come into force:

� the option of only recognising gains and losses that fall outside

a “corridor” (which was followed by a small minority of FTSE 100

companies) has been removed; and

� the “expected return on assets” has been abolished, replaced by a net

interest item calculated using the IAS19 discount rate.

4.2 Disclosures overhauledAs we have commented in previous surveys, the information given by

companies on their pension schemes in the past has not always been

commensurate with the pension risks that they run.

For example, lengthy pension disclosure notes have often lacked key

information needed to understand companies’ pension obligations, with

important messages obscured by unnecessary clutter and detail.

The new version of the accounting standard IAS19 is intended to remedy

this by introducing new, principles based, disclosure requirements that ask

companies to identify the key risks and figures that matter.

This year we have seen additional disclosure of items such as the

sensitivity of the pension figures to different assumptions and financial

conditions; and the average term to payment, or “duration”, of the

liabilities.

These are important improvements given that changes in financial

conditions can lead to huge changes in the pensions figures disclosed.

For example, a 0.5% increase in assumed future inflation would increase

FTSE 100 pension liabilities by over £35 billion.

As an example of changes that the new standard has brought,

Reckitt Benckiser did not mention pensions risk at all in its 2012 accounts.

However, it has included several paragraphs in its 2013 accounts as well as

quantifying the impact that changes in financial conditions might have on

its pension deficit.


4. Accounting standards

Similarly, in its 2013 accounts AstraZeneca includes details of hedging

strategies put in place by its pension scheme to protect against falls

in equity markets, currency movements, changes in interest rates and

increases in inflation. No mention was made of any such strategies in

previous years’ accounts.

In general, the new accounting standard has increased the level of

detail disclosed in relation to investment strategies. This is a welcome

improvement given the sophisticated strategies that are now in place for

many pension schemes sponsored by FTSE 100 companies.

4.3 Tail wagging the dog?With all the extra words and figures that companies are now required to

provide about their pension arrangements, there is a danger that some will

start to believe that the accounting numbers are “real” and so use them as

the basis for strategic decisions.

This is unwelcome as, in our view, decisions should be based on sound

advice and information rather than on the technical treatment of a

particular transaction under the accounting rules. Basing decisions on

accounting numbers seems to us to be a classic case of the accounting

“tail” wagging the strategic “dog”.

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38

Contentp38 5. Analysis of pension disclosuresp40 5.1 Introduction

p40 5.2 Analysis of results

p46 5.3 Key assumptions

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21 FTSE 100 companies disclosed a surplus in 2013 compared to just 15 of these companies in 2012.

Nick Bunch

Partner LCP

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

December 2012

December 2013

0

5

10

15

20

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

Num

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5. Analysis of pension disclosures40

5. Analysis of pension disclosures

5.1 IntroductionIn this section we have analysed 89 FTSE 100 companies reporting in

2013. 11 companies have been excluded as they do not sponsor a material

DB pension scheme either in the UK or overseas. A full list and summary

details of the 89 companies’ key pension disclosures are set out in

appendix 1.

We have concentrated on the financial position of the DB 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.

The disclosuresFor many FTSE 100 companies, pensions are financially significant and the

volume of information disclosed in the accounts reflects this.

The average pensions note is just over five pages, with most companies also

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

reports. The longest disclosures were by BT Group and Resolution, where

the main pension note ran across 10 pages of the 2013 report.

5.2 Analysis of results

Funding levelsIAS19 takes a snapshot of the accounting surplus or deficit at the

company’s year-end and 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.

21 out of the 89 FTSE 100 companies disclosed pension assets equal to

or in excess of accounting liabilities, compared to 15 of these companies

last year.

38 companies reported being less than 90% funded on an accounting

basis at their 2013 year-end compared with 47 companies in 2012.

The general improvement in funding levels is largely due to strong

investment returns over 2013, particularly on equities, and a slight increase

in corporate bond yields, offset to some extent by higher expectations of

future inflation.

5 pagesThe average length of a

FTSE 100 pensions note.



Changes over 2013The chart below shows how worldwide funding levels have changed

over the year for the 54 FTSE 100 companies in our report which have

December 2013 year-ends.

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

December 2012

December 2013

0

5

10

15

20

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

Num

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The average reported IAS19 funding level for companies with December

year-ends was 90% in 2013, compared to 87% in 2012.

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

0

2

4

6

8

10

12

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

Num

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March 2012

March 2013

March 2014

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

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The average reported IAS19 funding level for these companies was 98% at

March 2014 compared with 94% in 2013 and 92% in 2012. Notably, Royal Mail was 183% funded on an IAS19 basis at 31 March 2014 (compared to

133% funded at 31 March 2013) and this change has had a material impact

on the overall average.

Sources of deficits and surplusesFor the 54 companies with December year-ends, worldwide deficits

decreased by £11.7 billion over 2013. This is illustrated in the chart below.

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

Benefits earned

Net interest chargedInvestment experience & exchange rate dierences

New assumptions & experience

Overall movement in the deficit

15 10 5 0 5 10 15

Factors increasing deficit Factors decreasing deficit

Contributions

Our analysis shows that contributions paid (£10.8 billion) more than

covered the net IAS19 value of benefits earned over the year (£5.5 billion)

and the total net interest charge (£0.6 billion). In addition, positive

investment experience (£12.6 billion) outweighed increases in IAS19

liability values (£5.6 billion) that arose due to higher inflation assumptions.

Overall, this has led to a decrease in deficits of £11.7 billion 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 37% of market capitalisation, compared to 45% in 2012. This decrease

was largely due to increases in equity markets which increased the market

capitalisation of many companies.

Nevertheless, pension schemes still pose a very significant risk for certain

companies. For example, International Airlines Group’s accounting

liabilities were more than double the size of its market capitalisation.

However, due to the company’s share price increasing by over 100% during

2013 this represents a significant improvement from the position at the

end of 2012 when the accounting liabilities were over five times its market

capitalisation.

0

5

10

15

20

Num

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Accounting liabilities as a proportion of market capitalisation (%)

2012

2013

Under5

5to 14

15to 24

25to 49

50to 74

75to 99

100to 149

150to 199

200or over

For some companies, even the size of the IAS19 pension scheme deficit

is significant compared to the value of the company itself. For example,

BT Group’s accounting deficit was over 25% of the value of its market

capitalisation at its 2013 accounting year-end. We have highlighted the

six companies with largest liabilities compared to market capitalisation in

appendix 2.

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

compared to 5% in 2012 and 2011.

What have companies done to tackle their deficits?FTSE 100 companies paid contributions totalling £14.8 billion to their DB

schemes in 2013. This follows £16.8 billion of contributions paid in 2012,

£16.9 billion paid in 2011 and £17 billion paid in 2010. Slightly fewer than

half paid higher contributions during 2013 than in 2012, although a few, for

example BT Group, 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. Royal Dutch Shell was the only company to pay more than

£1 billion into its schemes over its 2013 accounting year. Three companies

paid more than £1 billion in 2012.

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, seven companies paid contributions lower than or equal to

the IAS19 value of benefits promised over the year. These were Amec,

Barclays, Intertek Group, London Stock Exchange Group, Mondi, Sage Group and Standard Life.

The chart below shows the length of time it would take for companies to

remove their IAS19 deficits based on the contributions paid during 2013.

0

5

10

15

20

25

30

In surplus Less than 5 years

5 to 10 years

10 to 15 years

15 to 20 years

Over 20 years

Num

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Expected time to pay o� IAS19 deficits

2012

2013



Pension schemes versus shareholdersThe following chart shows how pension deficits compare to dividends

paid. Of the 68 FTSE 100 companies that disclosed a pension deficit

in 2013, 22 disclosed a deficit that was greater than or equal to the

dividends paid to their shareholders in 2013. However, in 28 cases, the

2013 dividend was more than double the deficit at the 2013 financial year-

end, suggesting that these companies could pay off their pension scheme

deficit relatively easily if they wanted to.

0

5

10

15

20

25

Num

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Percentage of deficit that could be paid o� with one year's declared dividends (%)

Under50

50to 99

100to 149

150to 199

200to 249

250to 299

300to 349

350to 399

400or over

2012

2013

The chart below shows the company contributions paid over the 2013 and

2012 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 the shareholders. In 2013, five companies paid

more contributions into their pension schemes than they distributed in

dividends during their accounting year, compared to eleven in 2012.

0

5

10

15

20

25

30

Num

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of

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Contributions paid as a proportion of dividends paid (%)

Under 10 10to 19

20to 29

30to 39

40to 49

50to 59

60to 69

70to 79

80to 89

90to 99

100 orover

2012

2013

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clo

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s

5FTSE 100 companies that paid

more in pension contributions

than dividends.



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

“significant actuarial assumptions”. The revised version of IAS19 places

a greater emphasis on demographic assumptions than previously, with

mortality now explicitly brought out. Following the adoption of the new

IAS19 standard the number of companies disclosing some detail on this

assumption has increased.

74 of 89 companies have provided sufficient information in their 2013

accounts for us to derive basic mortality statistics – specifically a male life

expectancy at age 65 in the UK. This compares to 65 out of 86 in 2012.

Of the remaining 15, all but Coca Cola HBC have provided either non-UK

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

their mortality assumptions.

The following charts show the range of life expectancies assumed

under IAS19 by FTSE 100 companies for males aged 65 on the balance

sheet date.

0

5

10

15

20

25

30

86 87 88 89 90 or above

Num

ber

of

com

pan

ies

Life expectancy (rounded to nearest age)

Life expectancy assumptions reported in 2013UK males aged 65 on the accounting date

2012

2013



The average assumed life expectancy was 87.9 years – up from 87.7 years

in the same companies’ 2012 accounts.

Last year we noted that the rate of increase in assumed life expectancy

appeared to be slowing and this trend has continued in 2013. Although

49 companies disclosed higher life expectancy assumptions in 2013,

adding 0.3 years on average, 8 companies disclosed lower life expectancy

assumptions for some or all of their membership. For example, Aviva

reduced its assumed life expectancy for a 60 year old male in its main UK

pension scheme by 0.5 years, from 90.1 to 89.6 in 2013.

Standard Life has adopted the strongest mortality assumption, stating

in their 2013 accounts that male pensioners currently aged 60 will live on

average to age 91.

Research has shown that two of the main factors influencing life

expectancies are socio-economic group and income. In this respect it is

interesting to analyse the FTSE 100 companies’ assumed life expectancies

by the sector in which the company operates.

In the chart below the horizontal bars show the average 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.

80

82

84

86

88

90

92

Fin

anci

als

Hea

lthc

are

Oil

& G

as

Tel

eco

mm

unic

atio

ns

Co

nsum

er S

ervi

ces

Uti

litie

s

Ind

ustr

ials

Co

nsum

er G

oo

ds

Bas

ic m

ater

ials

Ag

e at

dea

th

Life expectancy assumptions reported in 2013 split by sectorUK males aged 65 on accounting date

15 33 2 4518 16

Companies in each sector at 31 December 2013

8

2013

2012

Ana

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dis

clo

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s87.9The average assumed life

expectancy for a 65 year old

man.



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.

The biggest change was in healthcare where the average increased from

88.2 to 88.7.

Future improvements in mortalityAs 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.

65 companies disclosed enough information in their accounts to analyse

how their allowance for future improvements in mortality has changed

compared to 2013. The following chart shows the allowance that these

companies have made for increases to longevity over the next 20 years.

0

5

10

15

20

25

30

Num

ber

of

com

pan

ies

Additional life expectancy improvements reported in 2013Improvements for UK male members aged 65 now versus aged 65 in 2033

Increase in life expectancy over next 20 years

Under0.5 years

0.5 to0.99 years

1 to1.49 years

1.5 to1.99 years

2 to2.49 years

2.5 to2.99 years

3 to3.49 years

3.5 yearsor over

2012

2013

On average, these companies assumed that UK pensioners retiring at

age 65 in 20 years’ time will live for 1.8 years longer, on average, than a

pensioner retiring today. This compares to 1.9 years in 2012. British Land Company and Capita have the weakest assumption –

appearing to make no allowance for improvements in life expectancy for

their male pension scheme members.

Overall, these companies increased their average assumption for the life

expectancy of a 65 year old in 2033 by 0.1 years, from 89.6 years in their

2012 accounts to 89.7 years in 2013.



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.

A 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 48 companies and the RPI

inflation assumption of 44 companies with a December year-end, together

with the assumption for CPI inflation disclosed by 19 of these companies.

Similarly, we have analysed the discount rates used by 15 companies and

the RPI inflation assumption of 15 companies with a March 2014 year-end,

together with the assumption for CPI inflation disclosed by 9 of these

companies. The results are summarised in the charts below.

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. The chart

below shows the discount rates adopted by companies reporting at the

end of December 2012, December 2013 and March 2014.

December 2012

December 2013

March 2014

Under 4.1 4.1 to 4.29 4.3 to 4.49 4.5 to 4.69 4.7 or over0

5

10

15

20

25

30

Num

ber

of

com

pan

ies

Discount rates used in December 2012, December 2013 and March 2014 (% pa)

Ana

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s



The average discount rate increased slightly over the year to December

2013, from 4.4% pa in December 2012 to 4.5% pa in December 2013.

The average discount rate used by FTSE 100 companies with a March 2014

year-end was 4.4% pa. The spread of discount rates used by FTSE 100

companies with a December 2013 year-end has decreased compared to

December 2012.

Travis Perkins and William Hill disclosed the highest discount rates for

a FTSE 100 company with a December year-end in their 2013 accounts

(4.7% pa in 2013 compared to 4.6% pa and 4.5% pa respectively in 2012).

GKN adopted the lowest assumption, using an average discount rate of

4.35% pa across its two UK pension schemes.

The new version of IAS19 requires companies to disclose the duration

of their pension liabilities for the first time, allowing us to compare the

discount rates used against the duration of the scheme. The chart below

shows that the yield on AA rated corporate bonds is relatively level at

terms of more than 12 years and the spread of discount rates adopted by

FTSE 100 companies reflects this.

0%

1%

2%

3%

4%

5%

6%

7%

0 5 10 15 20 25 30

Yie

ld

Term/duration (years)

31.12.13 - AA bond yieldsDiscount rates

Discount rates by duration used in 2013

Source: Merrill Lynch

Inflation - RPI assumptionsThe chart overleaf compares average long-term inflation assumptions as

measured by the Retail Prices Index (RPI). This shows that the average

RPI assumption increased from 3.0% pa in December 2012 to 3.4% pa in

December 2013. In March 2014 the average assumption was 3.4% pa.

4.5% paThe average discount rate

adopted at the end of

December 2013.



0

5

10

15

20

25

30

35

Under 2.7 2.7 to 2.89 2.9 to 3.09 3.1 to 3.29 3.3 to 3.49 3.5 to 3.69 3.7 or over

Num

ber

of

com

pan

ies

RPI inflation used in December 2012, December 2013 and March 2014 (% pa)

December 2012

December 2013

March 2014

For December 2013 year-ends, the highest RPI inflation assumption was

3.7% pa, adopted by Aggreko, Schroders and Standard Life. At the

other extreme Reed Elsevier, who reported at the same date, adopted an

assumption of 3.25% pa. The December 2013 RPI inflation assumptions had

a similar spread to those used in 2012, but are generally higher.

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 3.7% pa at the end of December 2013.

This suggests that, for a typical company to justify an assumption much

lower than this for future RPI inflation, a significant “inflation risk premium”

would need to be allowed for. 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 overleaf shows the difference between the discount rate and

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

reporting as at 31 December 2012, 31 December 2013 and 31 March 2014.

It shows that the net discount rate has reduced since December 2012, from

an average of 1.5% pa to 1.1% pa at 31 December 2013.

Ana

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clo

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s

3.4% paThe average RPI assumption

adopted at the end of

December 2013.



December 2012

December 2013

March 2014

0

5

10

15

20

Under 0.9 0.9 to 1.09 1.1 to 1.29 1.3 to 1.49 1.5 to 1.69 1.7 to 1.89 1.9 or over

Num

ber

of

com

pan

ies

Discount rates in excess of RPI inflation used in December 2012, December 2013 and March 2014 (% pa)

Inflation - CPI assumptionsSince 2010 the statutory minimum increases that pension schemes must

provide has 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.

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

practice is to derive an assumption for future CPI inflation by deducting

a margin from the assumed future level of RPI inflation. The chart below

shows the range of margins used by companies in their December

2012, December 2013 and March 2014 year-end accounts, where such

information was available.

0

2

4

6

8

10

12

Under 0.6 0.7 0.8 0.9 1.0 Over 1.0

Num

ber

of

com

pan

ies

Di�erence in RPI and CPI inflation assumptions used in December 2012, December 2013and March 2014 (% pa)

December 2012

December 2013

March 2014



At 31 December 2013 the average margin was 0.9% pa compared to

0.7% pa at 31 December 2012. The margin at 31 December 2012 may

have been artificially low as market expectations at that time were that

the Office for National Statistics (ONS) would announce a change in the

method of calculating RPI which would have the effect of moving RPI

closer to CPI. However, the ONS announced in January 2013 that there

would be no change in the calculation of RPI.

At 31 December 2013, Aviva used a long-term CPI inflation assumption

of 1.1% pa below its RPI inflation assumption, the largest margin at that

accounting date.

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

assumed rate of growth in pensionable pay affects the disclosed IAS19

liability and the cost of benefits being earned. A lower assumption

produces a lower projected pension and hence lower pension liabilities as

well as a lower charge to operating income.

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

the RPI inflation assumption) has remained at 0.5% pa in 2013. In recent

years a number of companies have introduced caps on, or even frozen,

increases in pensionable salary and as a result disclosed a salary increase

assumption lower than RPI inflation.

0

5

10

15

20

25

30

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

Num

ber

of

com

pan

ies

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

2012

2013

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

reduced, the assumption for salary growth has become less significant.

Ana

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Dec

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Dec

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Appendix 1: FTSE 100 accounting disclosure listing54


Appendix 1: FTSE 100 accounting disclosure listing

2013

Surp

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N

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ec1,6

60

(50

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(472

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3.4

0Y

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ND

ec2,

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(1,2

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(76

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Y

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re X

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son

Dec

58(3

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0Y

HS

BC

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ldin

gs

Dec

24,5

769

410

64

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Dec

1,29

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3.50

Y

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l To

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co G

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Sep

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30Y

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l Ho

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Dec

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(40

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3.38

Y

John

son

Mat

they

Mar

1,413

(19

5)(1

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03.

40

Y

Kin

gfi

sher

Feb

2,0

87

00

4.6

03.

30Y

Land

Sec

urit

ies

Gro

upM

ar19

36

64

.30

3.50

Y

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al &

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Dec

1,64

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64

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3.50

Y

Lloy

ds

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king

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Y

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ks &

Sp

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r G

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Mar

6,9

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64

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0Y

Meg

git

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88

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3.4

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Mel

rose

Ind

ustr

ies

Dec

1,071

(219

)(1

17)

4.4

03.

40

Y

Mo

ndi G

roup

Dec

89

(129

)(3

4)

ND

ND

N

Mo

rris

on

(Wm

) S

uper

mar

kets

Feb

2,8

39(2

0)

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iona

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Old

Mut

ual

Dec

573

83

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2012

Surp

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cit)

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ket

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tion1

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13(7

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1,58

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Y

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324

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1,211

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105

(17)

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DY

2,6

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1,94

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264

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635

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540

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56 LCP Accounting for Pensions 2014


2013

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cit)

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mp

any

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of

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sim

mo

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5724

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den

tial

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Rec

kitt

Ben

ckis

er G

roup

Dec

1,458

(134

)(2

3)4

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3.6

0Y

Ree

d E

lsev

ier

Dec

3,9

81

(379

)(2

19)

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olu

tio

n L

imit

edD

ec1,4

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Y

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amD

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9(3

07)

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Y

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Tin

toD

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lls-R

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ldin

gs

Dec

10,2

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RB

SD

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al D

utch

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llD

ec51

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(2,18

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DN

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ail

Mar

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RS

A In

sura

nce

Gro

upD

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BM

iller

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he)

Sep

17(1

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Dec

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5757

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 T

he fi

gur

es f

or

BA

E S

yste

ms

excl

ude

£1,0

29m

of

its

2013

defi

cit

(£1,1

48

m in

20

12)

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

.

4 L

egal

& G

ener

al a

nd P

rud

enti

al h

old

gro

up in

sura

nce

po

licie

s in

res

pec

t o

f so

me

of

thei

r o

blig

atio

ns. W

e ha

ve in

clud

ed t

he v

alue

of

thes

e p

olic

ies

in t

he fi

gur

es s

tate

d a

bov

e, a

s fo

llow

s: L

egal

& G

ener

al: £

64

6m

(2

012

: £6

36m

) an

d P

rud

enti

al: £

257m

(20

12: £

292m

).

5 T

he m

ost

rec

ent

acco

unts

fo

r W

eir

Gro

up c

over

the

53

wee

k p

erio

d e

ndin

g o

n 3

Janu

ary

2014

(th

e p

revi

ous

acc

oun

ts c

over

ed t

he 5

2 w

eek

per

iod

end

ing

on

31 D

ecem

ber

20

12).

Fo

r th

e p

urp

ose

s o

f th

is r

epo

rt w

e ha

ve in

clud

ed t

he 3

Jan

uary

20

14 a

cco

unts

wit

h th

e 31

Dec

emb

er 2

013

yea

r-en

d a

cco

unts

of

oth

er F

TS

E 1

00

co

mp

anie

s.

6 W

illia

m H

ill p

rod

uced

acc

oun

ts c

over

ing

the

52

wee

k p

erio

d e

ndin

g o

n 31

Dec

emb

er 2

013

and

the

53

wee

k p

erio

d e

ndin

g o

n 1

Janu

ary

2013

. The

fig

ures

sho

wn

rela

te t

o t

he a

cco

unts

fo

r th

e p

erio

d e

ndin

g o

n

31

Dec

emb

er 2

013

.

The

20

13 fi

gur

es a

re a

s at

the

end

of

the

acco

unti

ng p

erio

ds

end

ing

in 2

013

. T

he 2

012

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 b

een

conv

erte

d t

o p

oun

ds

ster

ling

whe

re a

co

mp

any

has

rep

ort

ed fi

gur

es in

its

acco

unts

in a

diff

eren

t cu

rren

cy.

Trad

itio

nally

, so

me

com

pan

ies

wit

h ov

erse

as p

ensi

on

pla

ns d

o n

ot

fund

the

m v

ia a

n ex

tern

al s

chem

e, in

stea

d b

acki

ng t

he p

ensi

on

pla

n w

ith

com

pan

y as

sets

, whi

ch m

ay r

esul

t in

a la

rger

defi

cit

bei

ng d

iscl

ose

d. W

here

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

1 co

mp

anie

s w

ho h

ad n

o e

vid

ence

of

sig

nifi

cant

defi

ned

ben

efit

pro

visi

on:

Ad

mir

al G

roup

, Ant

ofa

gas

ta, A

RM

Ho

ldin

gs,

Bri

tish

Sky

Bro

adca

stin

g, B

urb

erry

Gro

up,

Eas

yjet

, Har

gre

aves

Lan

sdo

wn,

Pet

rofa

c, R

and

go

ld R

eso

urce

s, S

hire

and

Tul

low

Oil.

The

fo

llow

ing

fo

ur c

om

pan

ies

have

ent

ered

the

FT

SE

10

0 in

dex

sin

ce 3

1 D

ecem

ber

20

13 a

nd h

ence

are

no

t in

clud

ed in

our

sur

vey:

3i G

roup

, Bar

ratt

Dev

elo

pm

ents

, Int

u P

rop

erti

es a

nd S

t Ja

mes

's P

lace

. The

fo

llow

ing

fo

ur c

om

pan

ies

have

exi

ted

the

FT

SE

10

0 in

dex

sin

ce 3

1 D

ecem

ber

20

13: A

mec

, Mel

rose

Ind

ustr

ies,

Tat

e &

Lyl

e an

d W

illia

m H

ill.

2013

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%

pa

Infla

tion1

% p

aD

iscl

ose

d

mo

rtal

ity?

2

TU

I Tra

vel

Sep

1,322

(66

1)(4

41)

4.4

03.

30Y

Uni

leve

rD

ec15

,28

3(1

,20

6)

(337

)4

.50

3.30

Y

Uni

ted

Uti

litie

s G

roup

Mar

2,4

42

1515

4.6

03.

30Y

Vo

daf

one

Gro

upM

ar3,

723

(577

)(5

15)

ND

ND

Y

Wei

r G

roup

(T

he)

Dec

56

81

(70

)(6

3)4

.40

3.4

0Y

Whi

tbre

adF

eb1,4

80

(54

2)(5

42)

4.6

03.

35Y

Will

iam

Hill

6D

ec31

0(1

8)

(18

)4

.70

3.4

0Y

Wo

lsel

eyJu

l1,3

06

(133

)(6

3)4

.50

3.4

0Y

WP

PD

ec72

6(2

47)

(10

4)

4.5

0N

DY

2012

Surp

lus/

(defi

cit)

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ket

valu

e o

f as

sets

£m

Tota

l£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te%

pa

Infla

tion1

% p

aD

iscl

ose

d

mo

rtal

ity?

2

1,34

3(6

48

)(4

62)

4.5

02.

70Y

14,3

09

(2,4

36)

(1,2

99

)4

.30

2.6

0Y

2,11

3(9

2)(9

2)5.

00

3.25

Y

1,60

4(3

06

)(2

48

)N

DN

DY

650

(90

)(8

2)4

.30

2.9

0Y

1,34

1(5

99

)(5

99

)4

.65

3.15

Y

296

(21)

(21)

4.5

03.

00

Y

96

1(3

58)

(28

7)4

.60

2.9

0Y

710

(334

)(1

76)

4.2

0N

DY



58

These tables show the key results of

analysis of the disclosures made by the

companies in the FTSE 100 as at

31 December 2013 that were reported

in their 2013 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

2013. 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

Company2013

Liabilities £m2012

Liabilities £m

Royal Dutch Shell 53,914 50,621

BT Group 47,422 40,989

Lloyds Banking Group 33,355 31,324

RBS 31,484 30,110

BP 29,569 30,602

Barclays 27,407 26,140

Largest deficits

Company2013

Deficit £m2012

Deficit £m

BT Group 5,856 2,448

BAE Systems1 3,540 4,555

BP 3,486 6,630

RBS 2,996 3,740

Tesco 2,378 1,872


1 The figures for BAE Systems exclude £1,029m of its 2013 deficit (£1,148m in 2012) allocated to

equity accounted investments and other participating employers.

Largest liabilities compared to market capitalisation

Company Liabilities £m Market cap £m

2013Liabilities/

Market cap %

2012Liabilities/

Market cap %

International Airlines Group 19,112 8,172 234 540

BT Group 47,422 21,889 217 234

RSA Insurance Group 6,677 3,341 200 143

BAE Systems2 25,943 14,112 184 230

RBS 31,484 20,838 151 154

Marks & Spencer Group 6,725 6,267 107 101

2 The figures for BAE Systems include all liabilities of the multi-employer plans that the group participates in.


Appendix 2: FTSE 100 accounting risk measures

5959

Largest deficit compared to market capitalisation

Company Deficit £m Market cap £m

2013Deficit/

Market cap %

2012Deficit/

Market cap %

BT Group 5,856 21,889 27 14

BAE Systems1 3,540 14,112 25 42

GKN 1,271 6,080 21 26

TUI Travel 661 4,111 16 25

RBS 2,996 20,838 14 19

G4S 504 4,073 12 13

3 Prudential holds group insurance policies in respect of some of its obligations. We have included the value of these policies in the asset

and liability figures stated above, which was £257m for 2013 (2012: £292m).

Highest funding level

Company Assets £m Liabilities £m

2013Assets/

Liabilities %

2012Assets/

Liabilities %

Royal Mail 3,343 2,513 133 91

Standard Life 3,244 2,683 121 116

Old Mutual 573 490 117 107

Next 609 543 112 107

Prudential3 6,944 6,298 110 119

Schroders 849 786 108 109

Lowest funding level

Company Assets £m Liabilities £m

2013Assets/

Liabilities %

2012Assets/

Liabilities %

Mondi Group 89 218 41 39

Sage Group 17 30 57 54

Hammerson 58 91 64 64

Fresnillo 14 21 66 66

GKN 2,532 3,803 67 74

TUI Travel 1,322 1,983 67 67




Appendix 2: FTSE 100 accounting risk measures60

Largest service cost4

Company2013

Service cost £m2012

Service cost £m

Royal Dutch Shell 1,212 982

BP 663 698

Tesco 482 492

Royal Mail 412 384

Barclays 375 377

RBS 373 4494 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.

Largest employer contributions

Company2013

Contributions £m2012

Contributions £m


RBS 821 977

BP 814 803

Lloyds Banking Group 804 669

Tesco 666 457

BAE Systems5 646 1,157

5 The figures for BAE Systems do not include contributions by the employer in respect of employee salary sacrifice arrangements.

Largest increase in employer contributions

Company

2013Employer

contributions£m

2012Employer

contributions£m

Increase inemployer

contributions£m

Diageo 593 190 403

Tesco 666 457 209

Royal Dutch Shell 1,649 1,452 197

HSBC Holdings 601 450 151

Lloyds Banking Group 804 669 135

Glencore Xstrata 113 24 89



Largest employer contributions compared to service cost4

CompanyContributions

£mService cost

£m

2013Contributions less service

cost £m

2012Contributions less service

cost £m

HSBC Holdings 601 71 530 97

Diageo 593 103 490 195

International Airlines Group 479 30 449 302

RBS 821 373 448 528

Lloyds Banking Group 804 356 448 293

Royal Dutch Shell 1,649 1,212 437 470

Highest equity allocation

Company

2013Equity allocation %

2012Equity allocation %

Ashtead Group 67 67

BP 66 67

Wolseley 66 62

Whitbread 59 54

Tesco 56 55

Travis Perkins 55 56

6 International Airlines Group, Royal Mail and Sports Direct did not pay a dividend in 2012 or 2013 but contributed £503m (2012: £479m),

£435m (2012: £429m) and £3m (2012: £3m) to their pension schemes respectively.

Highest employer contributions compared to dividends paid6

CompanyContributions

£mDividends

£m

2013Contributions /Dividends %

2012Contributions /Dividends %

Lloyds Banking Group 804 25 3,216 1,195

RBS 821 403 204 325

BAE Systems5 646 649 100 183

Babcock International Group 78 87 90 115

BT Group 542 683 79 369

RSA Insurance Group 122 162 75 46


Appendix 2: FTSE 100 accounting risk measures62

Lowest equity allocation

Company2013

Equity allocation %2012

Equity allocation %

Fresnillo 0 0

London Stock Exchange Group 3 15

InterContinental Hotels Group 4 14

Prudential 5 4

IMI 8 8

Aviva 9 9

Largest % increase in funding level

Company

2013Funding level

%

2012Funding level

%

Increase infunding level

%

Accounting date

Royal Mail 133 91 42 Mar

Glencore Xstrata 79 55 24 Dec

Wolseley 91 73 18 Jul

Rio Tinto 88 75 13 Dec

Old Mutual 117 107 10 Dec

BP 88 78 10 Dec

Largest % decrease in funding level

Company

2013Funding level

%

2012Funding level

%

Decrease infunding level

%

Accounting date

InterContinental Hotels Group 83 103 -20 Dec

Rolls-Royce Holdings 101 110 -9 Dec

Tate & Lyle 88 97 -9 Mar

Prudential 110 119 -9 Dec

GKN 67 74 -7 Dec

Experian 104 110 -6 Mar

Highest gain on assets7

Company2013

Gain %2012

Gain %

BG Group 14 14

BP 13 12

Old Mutual 13 11

Standard Life 13 5

GlaxoSmithKline 12 8

Rio Tinto 12 11

7 Figures calculated as a percentage of assets at the start of the accounting year (December year-ends only).


Appendix 3: Summary of disclosed non-cash funding arrangements

Company guarantee

Contributions to escrow account/trust

Charge over assets/ other security

Contributions based on company performance

Contributions contingent on other events

Asset backed funding arrangement

Notes

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Will

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lsel

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WP

P


Bob Scott

[email protected]

+44 (0)20 7439 2266

Nick Bunch

[email protected]

+44 (0)20 7439 2266

UK

c0

814

/08

14

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