LCP ACCOUNTING FOR PENSIONS 2015 2015 sees yet more changes in the UK pensions landscape. With new reporting and governance requirements on the horizon, our 22nd annual survey looks at how FTSE 100 companies manage their pension risks.
2 We would like to thank those from LCP who have made this report possible: Catriona Armstrong Nick Bunch Richard Chini Emma Colpus Jeremy Dell Peter Fitchett Linda Gilhooly Tricia Gulliver Sam Jenkins Claire Jones Geraint Jones Andrew Keenan Stuart Levy Sarah Lossin Dorothy Mendoza Martin Mercer Paul Meredith Chris Mitcheson Holly Moffat David Poynton Charlotte Quarmby Robin Rangeley Max Root Bob Scott Joanne Stewart Laura Strachan Sam Tomes Alex Waite Shaun Wood Chris Wragg 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 2015
3 LCP Accounting for Pensions 2015 p5 1. Executive Summary p8 p10 2.1 Introduction p10 2.2 The FTSE 100 accounting deficit p14 2.3 How have companies been managing their pension commitments? p18 2.4 Analysis of pension disclosures p36 Appendix 1 - FTSE 100 accounting disclosure listing p40 Appendix 2 - FTSE 100 accounting risk measures
Welcome to our 22nd annual survey of FTSE 100 companies pension disclosures. Bob Scott PARTNER, LCP Although FTSE100 companies have reduced their overall pension contributions again, many still have big schemes with big deficits.
LCP Accounting for Pensions 2015 1. Executive Summary 5 AT A GLANCE: The state of FTSE 100 pensions PENSION CONTRIBUTIONS The UK s largest employers continue to reduce their pension contributions 2012 16.8bn 2013 2014 14.8bn 12.5bn THE MOVE AWAY FROM DEFINED BENEFIT PENSION PROVISION CONTINUES Only 3 FTSE 100 companies providing any form of defined benefit pension provision as standard to new recruits What is the overall position for DB schemes? RISK - LIABILITIES AND DEFICITS Pension schemes potentially present significant financial risks to their sponsors 14 23 No UK defined benefit (DB) scheme DB scheme closed to accrual 10 companies combined pension 10 companies combined pension 14 36 DB scheme - final salary, with cap on salary increases DB scheme - final salary, no cap on salary increases liabilities of nearly 350bn deficits of nearly 40bn 13 DB scheme - non final salary 10% chance that the deficits could increase by 25bn or more over the next 12 months FUNDING IMPROVED FTSE 100 overall (at 31 July 2015) 553bn Total UK IAS19 liabilities 528bn Total assets 100 24FTSE companies disclosed a pension surplus at their 2014 accounting date compared to last year 21
6 LCP Accounting for Pensions 2015 1. Executive Summary Contributions down again The UK s largest employers continue to reduce their pension contributions. Total contributions to defined benefit schemes were 12.5 billion in 2014, compared to 14.8 billion in 2013 and 16.8 billion in 2012. Pensions: a potential risk for some Yet those pension schemes potentially present significant financial risks to their sponsors. Our research shows that: 10 companies had combined pension liabilities of nearly 350 billion; 10 companies had combined pension deficits of nearly 40 billion; and there is a 10% chance that those deficits could increase by at least a further 25 billion over the next 12 months. From October, new reporting rules will require companies not only to disclose their principal risks but to indicate which of those risks could potentially stop them trading and then to identify the steps they have taken to mitigate those risks. Net deficit slightly lower We estimate that the FTSE 100 as a whole had an overall (net) IAS19 deficit in respect of UK pensions of 25 billion at 31 July 2015, with total IAS19 liabilities of 553 billion against assets of 528 billion. A number of companies that paid large contributions in previous years have reverted to more "normal" levels.
LCP Accounting for Pensions 2015 1. Executive Summary 7 Liabilities rise to record levels Recent falls in corporate bond yields have caused reported liability values to rise to record levels - for example, in its December 2014 accounts Royal Dutch Shell reported pension liabilities of more than $100 billion and the accounting liabilities of BT Group s main pension scheme were over 50 billion at the end of March 2015. Defined benefits - the end of the road With almost all new FTSE 100 employees now being auto-enrolled into defined contribution pension schemes, the move away from defined benefit pension provision has continued. This will accelerate when contracting out ceases in April 2016. Executive Summary Tesco currently provides new joiners with access to a career average revalued earnings (CARE) scheme but has recently announced plans to close this to new joiners and to future accrual, which would leave only 3 companies providing new employees with defined benefit pensions as standard. A number of other FTSE 100 companies, including Anglo American and Standard Life announced that they would be closing their defined benefit schemes to existing members, leaving a dwindling number of companies with an ever reducing number of employees accruing additional pension on a defined benefit basis. See pages 14-17 What steps are companies taking to address pension risk? Pension risk may well be one of the main risks for FTSE 100 companies with legacy defined benefit pension schemes.
8 Content p8 p10 2.1 Introduction p10 2.2 The FTSE 100 accounting deficit p14 2.3 How have companies been managing their pension commitments? p18 2.4 Analysis of pension disclosures
Bob Scott Partner LCP Since January 2005, we estimate that the total pension liability of FTSE100 companies has almost doubled. Analysis of FTSE 100 accounting disclosures When yields fall, liability values increase. Nominal annual yield (% pa) Nominal annual yield (% pa) UK AA rated corporate bond yields 8% 7% 6% 5% 4% 3% decrease in nominal 45%approximate corporate bond yields over 10 years. 2005 2015 2% December December 2004 2005 Source: iboxx Source: iboxx December 2006 December 2007 December 2008 December 2009 December 2010 December 2011 December 2012 December 2013 December 2014
10 LCP Accounting for Pensions 2015 2. Analysis of pension disclosures 2.1. Introduction We have analysed the defined benefit pension disclosures for 87 FTSE 100 companies reporting in 2014. 12 of the FTSE 100 have been excluded as they do not sponsor a material defined benefit pension scheme and Dixons Carphone has also been excluded as no post-merger accounts are available for 2014. A full list and summary details of the 87 companies key pension disclosures are set out in appendix 1. 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. We have concentrated on the financial position of the defined benefit pension schemes in which the companies employees and former employees participate. Some companies offer post-retirement healthcare, which we have excluded from our analysis, where possible. Overseas pension arrangements have been included, except where otherwise indicated. 25 billion The estimated UK pension deficit for FTSE 100 companies under IAS19. All of the companies analysed have reported under international accounting standards (IAS19 for pension costs) as required under EU regulations. 2.2. The FTSE 100 accounting deficit We estimate that the combined FTSE 100 pension deficit in respect of UK liabilities was 25 billion at the end of July 2015, reflecting total IAS19 liabilities of 553 billion against assets of 528 billion. Since January 2005, we estimate that the total pension liability of FTSE 100 companies has almost doubled. We have included a list of the ten companies with the largest disclosed pension liabilities in appendix 2.
LCP Accounting for Pensions 2015 11 billion The chart below 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. 10 0-10 -20-30 -40 Estimated IAS19 position for UK schemes of FTSE 100 companies Jun 2010 Dec 2010 Jun 2011 Dec 2011 Jun 2012 Dec 2012 Jun 2013 Dec 2013 Jun 2014 Dec 2014 Jun 2015 Analysis of FTSE 100 accounting disclosures -50-60 -70 A combination of strong investment returns, payment of deficit contributions and low levels of inflation has offset the impact of significant falls in bond yields, which have led to a material increase in reported liability values. Overall, the total deficit has reduced by 12 billion from the position at 30 June 2014. However, the change in deficit or surplus for a particular company s pension scheme depends heavily on its investment strategy and, in particular, on the extent to which it has been hedged against changes in long-term interest rates. Over the last 5 years the total deficit has fluctuated between 10bn and nearly 60bn.
12 LCP Accounting for Pensions 2015 Corporate bond yields Under IAS19, pension liabilities are valued by reference to the yield available on high quality corporate bonds all else being equal, this means that when yields fall, liability values increase and vice versa. The chart below shows how UK corporate bond yields have varied since the start of 2008, just prior to the height of the UK credit crunch. UK AA rated corporate bond yields 8% 7% Nominal annual yield (% pa) 6% 5% 4% 3% 60% The reduction in the yield available on corporate bonds since the height of the credit crunch in 2008. 2% December December December December December December December December 2007 2008 2009 2010 2011 2012 2013 2014 Source: iboxx Since late 2008 when the yield on the iboxx AA over 15 year corporate bond index peaked at more than 7.5% pa there has been a relatively constant fall in yields with the index hitting a low of just under 3% pa in January 2015. Our 2008 survey showed that FTSE 100 companies had IAS19 pension liabilities of 368 billion in July 2008. Seven years later that figure has risen by over 50% to 553 billion, and companies have pumped in more than 50 billion of deficit contributions in the meantime.
LCP Accounting for Pensions 2015 13 Pension risk the viability statement The increase in the size of reported liabilities illustrates the potentially material level of pension risk being run by a number of FTSE 100 companies. Our research shows that: 10 companies reported combined pension liabilities of nearly 350 billion; 10 companies reported combined pension deficits of nearly 40 billion; and there is a 10% chance that those deficits could increase by at least a further 25 billion over the next 12 months due to financial factors alone. Under current accounting standards, companies are already required to disclose details of the risks associated with their pension schemes in their accounts. However, from October 2015, additional reporting requirements will come into force under an updated version of the UK corporate governance code. Analysis of FTSE 100 accounting disclosures This will require the directors of most listed companies to confirm that they have carried out a robust assessment of the main risks facing their business, including those that would threaten its solvency. Furthermore, there is a new requirement to include a viability statement in the annual accounts, confirming whether the directors expect the company will be able to continue in operation, taking into account its current position and principal risks. Pension risk may well be one of the main risks for FTSE 100 companies with legacy defined benefit pension schemes. The new requirement may therefore increase the level of disclosure required in relation to this. Based on the information in existing accounting disclosures, BAE Systems, BT Group, International Airlines Group, Sainsbury s and RSA Insurance Group are companies that may be running significant levels of pension risk relative to the size of their business. Pension risk may well be one of the main risks for FTSE 100 companies with legacy defined benefit pension schemes.
14 LCP Accounting for Pensions 2015 2.3. How have companies been managing their pension commitments? Reductions in defined benefit pension provision None of the FTSE 100 companies we have analysed provide traditional final salary pensions to new employees and there are only 4 FTSE 100 companies providing any form of defined benefit pension provision as standard to new recruits. These are Diageo, Johnson Matthey and Morrisons, which provide cash balance schemes, and Tesco, which provides a career average revalued earnings ( CARE ) scheme. In its 2015 accounts Tesco reported that it was in consultation to close this CARE scheme to both new entrants and future accrual. A number of other companies stated that they had either closed their defined benefit pension scheme to future accrual during the last year, or had plans to do so in the near future: Anglo American announced that its only remaining UK plan with continuing accrual will close on 30 September 2015. Hammerson closed its pension scheme to accrual in July 2014 and as a result disclosed a 3 million gain in its 2014 accounts. Morrisons reported that it was consulting on the closure of its 2 historic CARE schemes to future accrual. Standard Life announced that it will close its pension plan to accrual from April 2016, replacing it with an enhanced defined contribution pension plan. In addition, HSBC, Severn Trent and Weir Group have all previously reported that they have reached agreement to close their pension schemes to future accrual during 2015. The move away from defined benefit pension provision continues apace.
LCP Accounting for Pensions 2015 15 With the move towards defined contribution pension provision firmly established, other changes have been made in recent years that reduce the employer cost of the remaining defined benefit pensions still being built up. For example, in its March 2015 accounts, Babcock disclosed that it had capped pensionable salaries and increased employee contributions to one of its three main pension schemes, with similar changes expected to come into effect in its other two main schemes from June 2015. The chart below shows the numbers of companies providing continuing defined benefit pension provision, after allowing for the changes listed above. These changes will leave only 36 FTSE 100 companies providing traditional final salary pensions to any of their employees. 13 14 No UK defined benefit (DB) scheme DB scheme closed to accrual 36 FTSE 100 companies providing traditional final salary pension accrual to any employees. Analysis of FTSE 100 accounting disclosures 36 14 23 DB scheme - final salary, with cap on salary increases DB scheme - final salary, no cap on salary increases DB scheme - non final salary With the ability to contract out of the state pension system coming to an end in April 2016, we are likely to see an acceleration in the number of companies closing their pension schemes to future accrual, in order to mitigate the increase in national insurance cost that arises when the current rebate most receive disappears.
16 LCP Accounting for Pensions 2015 Liability management exercises Many companies are naturally now placing increased focus on managing their legacy pension arrangements and removing risk from their balance sheet. One popular way of achieving this is to carry out a pension increase exchange ( PIE ) exercise, where members of the pension scheme are given the option to exchange some or all of the future increases on their pension in return for a higher current level of pension. This reduces inflation risk and can result in a cost saving, if members accept a deal which is less than fair value. Several FTSE 100 companies carried out liability management exercises during 2014: BAE Systems reported that it carried out a PIE exercise in its main scheme in May 2014, with 38% of pensioners opting to exchange future increases on part of their pensions for higher non-increasing pensions. Centrica offered pensioners the option to receive a higher pension in return for giving up certain future increases linked to RPI, which gave rise to a past service credit of 10 million. GKN reported that it had commenced a PIE exercise to mitigate inflation risk, which would conclude in early 2015. Taylor Wimpey has completed a flexible retirement offer for deferred members, which allowed participants to realise part of their pension at an earlier date than previously anticipated. This has resulted in 25 million of pension liability being transferred out of its pension schemes. On the back of a PIE exercise for pensioners which resulted in a 28% take up rate, TUI Travel has introduced pension increase exchange as a standard retirement option for active and deferred members, with a 28 million past service credit arising on the basis of expected future take up rates. Liability management exercises can be a win-win for companies and members.
LCP Accounting for Pensions 2015 17 Pension freedoms and flexibilities It is too early for companies to have reported in their accounts on the impact of the 2014 budget changes. However, since April 2015, defined contribution schemes have become more attractive as individuals can access their pension savings with much greater flexibility than previously. This gives rise to opportunities for companies to manage their defined benefit liabilities by giving members the opportunity to access those flexibilities. This could be via partial transfer values at retirement; full commutation of smaller pensions; or simply by offering to pay for members to take financial advice on their options. De-risking of investment strategies As pension schemes mature and the time horizon for payment of benefits decreases, companies and pension scheme trustees have typically looked to reduce the investment risks posed by the pension scheme. This is of increasing importance as schemes close to future accrual and ongoing contributions reduce because pensions and other benefits then need to be paid out of investment income or by realising assets. With increasingly complex investment strategies some of which are not fully explained in accounting disclosures it has become more difficult to split FTSE 100 pension scheme assets into bonds and equities. However, the general trend away from equities does appear to have continued with a modest movement of assets out of equities and into bonds and other asset classes during 2014. This is illustrated in the chart below. 30% The average allocation of FTSE 100 pension scheme assets to equities. Analysis of FTSE 100 accounting disclosures Overall asset allocation for FTSE 100 companies with December year-ends 100% 80% Other Bonds Equities 60% 40% 20% 0% Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
18 LCP Accounting for Pensions 2015 2.4. Analysis of pension disclosures The average pensions note runs to just over five pages, with most companies also having several paragraphs of pension commentary in the main body of their reports. The longest disclosure was produced by BP, which covered 10 pages of its 2014 report. Funding levels IAS19 takes a snapshot of the accounting surplus or deficit at the company s year-end and in most cases this is the number that appears on the balance sheet. However, in some cases, complex rules under IAS19 can result in a restriction on the asset recognised on the balance sheet where a pension scheme is in surplus, or a higher liability being recognised as a result of the funding agreements in place with the pension scheme trustees. 18 companies were affected by this issue in 2014 and in some cases the amounts involved were material for example, Scottish & Southern Energy and Standard Life added 201 million and 414 million to their balance sheets respectively. Recently proposed changes to the IAS19 accounting standard may mean that these adjustments are more common in future. However, the impact will depend on the precise wording of each company s pension scheme rules. 24 FTSE 100 companies disclosed a pension surplus at their 2014 accounting date. Of the 87 FTSE 100 companies we analysed, 24 disclosed pension assets equal to or in excess of accounting liabilities, which compares to 21 of these companies last year. This general improvement was despite the large fall in corporate bond yields, and arose due to strong investment returns over 2014 for schemes that had significant levels of hedging against falls in interest rates, either through investment in government and corporate bonds, or as a result of holding interest rate swaps. Royal Mail disclosed the highest 2014 funding level 183% as at 31 March 2014. 38 companies reported being less than 90% funded on an accounting basis at their 2014 year-end. This is the same number as in 2013.
LCP Accounting for Pensions 2015 19 Changes over 2014 The chart below shows how worldwide funding levels have changed over the year for the 52 FTSE 100 companies in our report which have December 2014 year-ends. Ratio of assets to IAS19 liabilities at end of December (%) 20 Number of companies 15 10 5 0 Under 60 60 to 69 70 to 79 80 to 89 90 to 99 100 to 109 December 2013 December 2014 110 or over Analysis of FTSE 100 accounting disclosures The average reported IAS19 funding level for companies with December year-ends was 90% in 2014, which remains unchanged from 2013. We have shown a similar chart for those companies with March year-ends below the overall trend is a slight improvement in funding levels between March 2014 and March 2015. Ratio of assets to IAS19 liabilities at end of March (%) 7 6 March 2013 March 2014 Number of companies 5 4 3 2 March 2015 1 0 Under 70 70 to 79 80 to 89 90 to 99 100 to 109 110 or over
20 LCP Accounting for Pensions 2015 The average reported IAS19 funding level for these companies was 103% at March 2015 compared with 101% in 2014 and 97% in 2013. Notably, Royal Mail was 193% funded on an IAS19 basis at 31 March 2015 the 10% increase compared to 31 March 2014 being in part due to an investment strategy that hedges liabilities including those expected to accrue over the period until 2017 against falls in interest rates. Sources of deficits and surpluses For the 52 companies with December year-ends, worldwide deficits increased by 5.1 billion over 2014. This is illustrated in the chart below. IAS19 sources of deficits and surpluses for companies with December year-ends only ( billion) Factors increasing deficit Factors decreasing deficit 50 40 30 20 10 0 10 20 30 40 50 Benefits earned Contributions Net interest charged New assumptions & experience Investment experience & exchange rate differences Overall movement in the deficit The total contributions paid by these companies ( 9.2 billion) more than covered the net IAS19 value of benefits earned over the year ( 5.8 billion) and the total net interest charge ( 1.1 billion). However, increases in IAS19 liability values ( 45.8 billion) more than offset the benefits of positive investment experience ( 38.4 billion). Overall, this has led to an increase in deficits of 5.1 billion for these companies.
LCP Accounting for Pensions 2015 21 Pension schemes in relation to their sponsoring companies The chart below shows the size of accounting liabilities relative to companies market capitalisations. The average FTSE 100 pension liability was 35% of market capitalisation, compared to 36% in 2013, and 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. Accounting liabilities as a proportion of market capitalisation (%) 25 2013 2014 20 Number of companies 15 10 5 35% The average size of pension liabilities compared to market capitalisation. Analysis of FTSE 100 accounting disclosures 0 Under 5 5 to 14 15 to 24 25 to 49 50 to 74 75 to 99 100 to 149 150 to 199 200 or over For some companies, even the size of the IAS19 pension scheme deficit is significant compared to the value of the company itself. BAE Systems accounting deficit was over 35% of the value of its market capitalisation at its 2014 accounting year-end. We have highlighted the ten companies with largest liabilities compared to market capitalisation in appendix 2. On average, pension scheme deficits were 5% of market capitalisation, compared to 4% in 2013.
22 LCP Accounting for Pensions 2015 2.3 bn The reduction in employer contributions to defined benefit pension schemes this year. Pension scheme contributions FTSE 100 companies paid contributions totalling 12.5 billion into their defined benefit pension schemes in 2014 of which we estimate just over half 7.1 billion went towards the cost of additional benefit accrual for current employees. Whilst this is a significant amount to have been paid, it is a noticeable reduction from the 14.8 billion of contributions paid in 2013, 16.8 billion paid in 2012 and 16.9 billion paid in 2011. The fall mainly reflects large one-off contributions made by a small number of companies to their pension schemes in previous years. For example, Diageo made a one-off contribution to its UK pension plan of 400 million in 2013 which was not repeated in 2014 and the 2012 figures include a 2 billion special contribution made by BT Group. The chart below shows how company payments, including those to defined contribution pension schemes, have changed since 2007. Employer contributions to pension schemes 25 20 Deficit contributions (DB schemes) Employer service cost (DB schemes) Employer DC costs billion 15 10 5 0 2007 2008 2009 2010 2011 2012 2013 2014
LCP Accounting for Pensions 2015 23 The ten companies that paid the highest contributions to their defined benefit pension schemes are shown in appendix 2. RBS and Royal Dutch Shell were the only companies to pay more than 1 billion over their 2014 accounting year. Royal Dutch Shell was the only company to pay more than 1 billion in 2013. Most companies pay contributions at a rate greater than the IAS19 value of benefits earned over the year. If the IAS19 assumptions were borne out in reality, this excess would reduce the IAS19 deficit. However, twelve companies paid contributions lower than or equal to the IAS19 value of benefits promised over the year. These were Associated British Foods, AstraZeneca, Experian, Fresnillo, Intertek Group, Mondi Group, Royal Dutch Shell, Royal Mail, Sage Group, Schroders, Standard Life and Tesco. Some of these companies had IAS19 surpluses but, for others, this analysis suggests that contributions will need to increase if they are to recover their IAS19 deficit. 12 companies paid contributions that were lower than or equal to the value of benefits built up over the year. Analysis of FTSE 100 accounting disclosures The chart below shows the length of time it would take for companies to remove their IAS19 deficit based on the contributions paid during 2014, if the IAS19 assumptions were borne out in practice. Expected time to pay off IAS19 deficits 30 25 2013 2014 20 Number of companies 15 10 5 0 In surplus Less than 5 years 5 to 9.9 years 10 to 14.9 years 15 to 19.9 years 20 years and over
24 LCP Accounting for Pensions 2015 Pension schemes versus shareholders The chart below shows how dividends paid compare to pension deficits. Of the 63 FTSE 100 companies that disclosed a pension deficit in 2014, 23 disclosed a deficit that was greater than or equal to the dividends paid to their shareholders in 2014. However, in 25 cases, the 2014 dividend was more than double the deficit at the 2014 financial year-end, suggesting that these companies could pay off their pension scheme deficit relatively easily if they wanted to. Percentage of deficit that could be paid off with one year's declared dividends (%) 20 2013 2014 15 Number of companies 10 5 0 Under 50 50 to 99 100 to 149 150 to 199 200 to 249 250 to 299 300 to 349 350 to 399 400 or over The chart below shows the company contributions paid over companies 2014 and 2013 accounting years as a percentage of dividends distributed 7 over these periods and therefore illustrates the amount of cash paid to companies paid at least as pension schemes in preference to shareholders. In 2014, seven companies, much in pension contributions including Lloyds Banking Group and RBS, paid at least as much in pension as they distributed in dividends. contributions as they distributed in dividends during their accounting year. Contributions paid as a proportion of dividends paid (%) 40 Number of companies 35 30 25 20 15 10 2013 2014 5 0 Under 10 10 to 19 20 to 29 30 to 39 40 to 49 50 to 59 60 to 69 70 to 79 80 to 89 90 100 to 99 or over
LCP Accounting for Pensions 2015 25 Key assumptions We 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 expectancy Under the IAS19 standard, companies are required to disclose any significant actuarial assumptions, and we would generally expect this to include mortality. 78 of 87 companies have provided sufficient information in their 2014 accounts for us to derive basic mortality statistics specifically a male life expectancy at age 65 in the UK. This compares to 74 out of 89 in 2013. Of the remaining 9, eight provided either non-uk life expectancies, a range of life expectancies, or a narrative description of their mortality assumptions. Coca Cola HBC was the only company that did not disclose any information about the mortality assumption used. Analysis of FTSE 100 accounting disclosures The following charts show the range of life expectancies assumed under IAS19 by FTSE 100 companies for males aged 65 on the balance sheet date. Life expectancy assumptions reported in 2014 UK males aged 65 on the accounting date 35 Number of companies 30 25 20 15 10 2013 2014 5 0 85.9 or less 86 to 86.9 87 to 87.9 88 to 88.9 89 to 89.9 90 or above
26 LCP Accounting for Pensions 2015 88 years The average assumed life expectancy for a 65 year old man. The average assumed life expectancy was 88.0 years up from 87.9 years in the same companies 2013 accounts. The average life expectancy disclosed by companies in their 2008 accounts was just 86.5 years so the average has increased by 1.5 years in the past 6 years or by 3 months every year. However, last year we noted that the rate of increase in assumed life expectancy appeared to be slowing and this trend has continued in 2014. Although 46 companies disclosed higher life expectancy assumptions in 2014, adding 0.4 years on average, 12 companies disclosed lower life expectancy assumptions for some or all of their membership. For example, Standard Life reduced its average disclosed life expectancy for a 60 year old male by 2 years, from 91 to 89 in 2014, whilst Capita reduced its average assumed life expectancy for a 65 year old male in its main pension scheme by 1.3 years, from 89.1 to 87.8 in 2014. Land Securities assumed the longest life expectancy, stating in its 2014 accounts that male pensioners currently aged 60 will live on average to age 91.1. 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 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. Life expectancy assumptions reported in 2014 split by sector UK males aged 65 on accounting date 92 90 2013 2014 88 86 84 82 80 Financials Healthcare Oil & Gas Consumer Services Basic Materials Consumer Goods Industrials Utilities Telecommunications Age at death Companies in each sector at 31 December 2014 18 3 2 17 4 10 17 5 2
LCP Accounting for Pensions 2015 27 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 expectancy is found in the telecommunications sector. The biggest change was in the basic materials sector, where the average assumed life expectancy increased from 87.4 to 87.9. Future improvements in mortality As 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. The allowance for future improvements can have a significant impact on the IAS19 value of pension scheme liabilities, and hence deficits. 75 companies disclosed enough information in their accounts to analyse how their allowance for future improvements in mortality has changed compared to 2013. The chart below shows the allowance that these companies have made for increases in life expectancy over the next 20 years. Analysis of FTSE 100 accounting disclosures Additional life expectancy improvements reported in 2014 Improvements for UK male members aged 65 now versus aged 65 in 2034 35 Number of companies 30 25 20 15 2013 2014 10 5 0 Under 0.5 years 0.5 to 0.99 years 1 to 1.49 years 1.5 to 1.99 years 2 to 2.49 years 2.5 to 2.99 years Increase in life expectancy over next 20 years 3 to 3.49 years 3.5 years or over On average, these companies assumed that UK pensioners retiring at age 65 in 20 years time will live for 1.8 years longer than a pensioner retiring today. This is the same as the average increase in life expectancy assumed in 2013. 1.8 years The average assumed increase in life expectancy for men over the next 20 years. Overall, these companies increased their average assumption for the life expectancy of a 65 year old in 2034 by 0.2 years, from 89.6 years in their 2013 accounts to 89.8 years in 2014.
28 LCP Accounting for Pensions 2015 Discount rates and inflation The discount rate is used to calculate a present value of the projected pension benefits. A lower discount rate means a higher IAS19 value of pension liabilities and vice versa. The typical FTSE 100 company has pension liabilities that are linked to price inflation. A decrease in the price inflation assumption will lead to a lower level of projected benefit payments, and hence a lower IAS19 value being placed on those benefits, all other things being equal. We have analysed the discount rates used by 45 companies and the RPI inflation assumption of 40 companies with a December year-end, together with the assumption for CPI inflation disclosed by 18 of these companies. Similarly, we have analysed the discount rates used by 13 companies and the RPI inflation assumption of 12 companies with a March 2015 year-end, together with the assumption for CPI inflation disclosed by 7 of these companies. The results are summarised in the charts below. Discount rates Under 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. Discount rates used in December 2013, December 2014 and March 2015 (% pa) Number of companies 20 15 10 5 December 2013 December 2014 March 2015 0 Under 3.2 3.2 to 3.29 3.3 to 3.39 3.4 to 3.49 3.5 to 3.59 3.6 to 3.69 3.7 to 3.79 3.8 to 3.89 3.9 to 3.99 4 to 4.09 4.1 to 4.19 4.2 to 4.29 4.3 to 4.39 4.4 to 4.49 4.5 to 4.59 4.6 to 4.69 4.7 or over
LCP Accounting for Pensions 2015 29 The average discount rate decreased significantly over the year to December 2014, from 4.5% pa in December 2013 to 3.6% pa in December 2014. The average discount rate used by FTSE 100 companies with a March 2015 year-end was even lower at 3.3% pa. The spread of discount rates used by FTSE 100 companies with a December 2014 year-end has increased compared to December 2013, with a 0.5% spread of rates compared to a 0.35% spread last year. Centrica disclosed the highest discount rate for a FTSE 100 company with a December year-end in their 2014 accounts (3.9% pa in 2014 compared to 4.6% pa in 2013). IAS19 requires companies to disclose the duration of their pension liabilities, allowing us to compare the discount rates used against the duration of the scheme, as shown in the chart below. Discount rates by duration used at 31 December 2014 5% AA rated corporate bonds Discount rates 4% 3.6% pa The average discount rate for December 2014 yearends, 0.9% pa lower than a year earlier. Analysis of FTSE 100 accounting disclosures Yield / discount rate 3% 2% 1% 0% 0 5 10 15 20 25 30 Duration Source: Merrill Lynch Inflation - RPI assumptions The chart on the following page shows long-term inflation assumptions as measured by the Retail Prices Index (RPI). The average RPI assumption decreased from 3.4% pa in December 2013 to 3.1% pa in December 2014. In March 2015 this decreased again, to 3.0% pa. 3.0% pa The average assumption for future RPI inflation at the end of March 2015.
30 LCP Accounting for Pensions 2015 RPI inflation used in December 2013, December 2014 and March 2015 (% pa) 30 Number of companies 25 20 15 10 5 December 2013 December 2014 March 2015 0 Under 2.9 2.9 to 3.09 3.1 to 3.29 3.3 to 3.49 3.5 to 3.69 3.7 or over For December 2014 year-ends, the highest RPI inflation assumption was 3.35% pa, adopted by Standard Life. At the other extreme RELX Group and Unilever, who both reported at the same date, adopted an assumption of 2.9% pa. In general, the December 2014 RPI inflation assumptions had a similar spread to those used in 2013, but were lower. The Bank of England publishes statistics for future price inflation implied by gilt spot rates. These showed that long-term RPI inflation implied by 20 year gilt spot rates was around 3.3% pa at the end of December 2014. This suggests that, in order to justify an assumption much lower than this for future RPI inflation, companies may be allowing for a significant inflation risk premium. This represents the theoretical return that investors are willing to forgo when investing in index-linked gilts, in return for the inflation protection that these assets provide. In practice, it is the discount rate net of assumed future price inflation which is the key assumption. The chart below shows the difference between the discount rate and the assumption for RPI inflation (the net discount rate) for companies reporting as at 31 December 2013, 31 December 2014 and 31 March 2015. It shows that the net discount rate has reduced since December 2013, from an average of 1.1% pa to 0.5% pa at 31 December 2014. Notably, two companies were using negative net discount rates at 31 March 2015. These were British Land and Land Securities, adopting net discount rates of -0.2% pa and -0.1% pa respectively.
LCP Accounting for Pensions 2015 31 Discount rates in excess of RPI inflation used in December 2013, December 2014 and March 2015 (% pa) Number of companies 20 15 10 5 0 December 2013 December 2014 March 2015 Under 0 0 to 0.19 Inflation - CPI assumptions 0.2 to 0.39 0.4 to 0.59 0.6 to 0.79 0.8 to 0.99 1 to 1.19 1.2 or over Since 2010 the statutory minimum level of 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. In practice the inflation measure applying in a particular pension scheme depends on the wording of the scheme rules and their interaction with the relevant legislation setting out minimum increases. Many companies have determined that some of the benefits in their pension scheme should increase in line with CPI inflation. 1.0% pa The average assumption for the difference between RPI and CPI Analysis of FTSE 100 accounting disclosures 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 2013, December 2014 and March 2015 year-end accounts, where such information was available.
32 LCP Accounting for Pensions 2015 Difference in RPI and CPI inflation assumptions used in December 2013, December 2014 and March 2015 (% pa) Number of companies 15 10 5 December 2013 December 2014 March 2015 0 Under 0.8 0.8 to 0.89 0.9 to 0.99 1 to 1.09 1.1 or over At 31 December 2014 the average margin was 1.0% pa compared to 0.9% pa at 31 December 2013. At 31 December 2014, Aviva, Persimmon, Schroders and Rolls-Royce Holdings used a long-term CPI inflation assumption of 1.1% pa below their RPI inflation assumption, the largest margin at that date. 0.1% pa The average assumption for real increases in pensionable pay, down from 1.5% pa 10 years ago. Increases in pensionable pay For 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) was 0.1% in 2014. 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. The average assumption has dropped from 0.5% pa in 2013 and from 1.5% pa 10 years ago.
LCP Accounting for Pensions 2015 33 Pensionable pay growth rates used in excess of RPI inflation (% pa) Number of companies 30 25 20 15 10 5 0 Under -1.5-1.5 to -0.76-0.75 to -0.01 0 to 0.74 0.75 to 1.49 1.5 to 2.24 2013 2014 2.25 or over As the number of active members in final salary pension schemes has reduced, the assumption for salary growth has become less significant. Analysis of FTSE 100 accounting disclosures
34 Content p36 Appendix 1 - FTSE 100 accounting disclosure listing p40 Appendix 2 - FTSE 100 accounting risk measures
Nick Bunch Partner LCP 24 FTSE 100 companies disclosed a pension surplus in 2014, compared to 21 companies in 2013 Appendices
36 LCP Accounting for Pensions 2015 Appendix 1: FTSE 100 accounting disclosure listing This table shows the key disclosures made by the companies in the FTSE 100 as at 31 December 2014 that reported IAS19 figures in their 2014 accounts. The source of the data is each company s annual report and accounts for the accounting period ending in 2014. The market value of assets and surplus/(deficit) figures exclude post retirement medical benefits where possible and relate to the worldwide position of each company, not just the UK schemes. Figures shown are before deferred tax and before any balance sheet asset limits have been applied. All figures are rounded to the nearest million pounds. The discount rate and price inflation assumptions refer to those disclosed for the companies main UK schemes where available. ND means no UK specific figures were disclosed. 2014 Surplus/(deficit) 2013 Surplus/(deficit) Company Yearend Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 3i Group Mar 899 197 197 4.50 3.40 Y 907 170 170 4.40 3.30 Y Aberdeen Asset Management Sep 192 (4) (4) 4.00 3.20 Y 176 (4) (4) 4.50 3.40 Y Aggreko Dec 91 (7) (7) 3.80 3.30 Y 78 (6) (6) 4.50 3.70 Y Anglo American Dec 3,601 (159) (19) 3.60 3.10 Y 3,189 (215) (85) 4.40 3.40 Y Ashtead Group Apr 84 6 6 4.30 3.50 Y 78 0 1 4.20 3.40 Y Associated British Foods Sep 3,485 (31) 46 4.10 3.40 Y 3,233 (3) 64 4.70 3.50 Y AstraZeneca Dec 6,778 (1,870) (1,493) 3.50 3.10 Y 6,223 (1,347) (1,031) 4.50 3.50 Y Aviva Dec 15,474 2,304 2,424 3.70 3.10 Y 12,398 239 357 4.40 3.40 Y Babcock International Group Mar 3,220 (268) (268) 4.50 3.30 Y 3,205 (261) (261) 4.40 2.80 Y BAE Systems 3 Dec 23,675 (5,387) (5,208) 3.60 3.20 Y 21,374 (3,540) (3,357) 4.50 3.40 Y Barclays Dec 28,874 (1,329) (1,043) 3.67 3.05 Y 25,743 (1,664) (1,366) 4.46 3.42 Y Barratt Developments Jun 330 3 3 4.30 3.30 Y 295 (13) (13) 4.70 3.40 Y BG Group Dec 1,285 (165) (117) 3.70 3.10 Y 1,163 (101) (57) 4.50 3.40 Y BHP Billiton Jun 778 (48) 13 4.10 3.10 Y 1,248 (40) 34 4.50 3.60 Y BP Dec 28,141 (5,507) (883) 3.60 3.00 Y 26,083 (3,486) 581 4.60 3.30 Y British American Tobacco Dec 6,253 (628) (341) 3.40 3.00 Y 5,767 (377) (138) 4.40 3.40 Y British Land Co Mar 131 6 6 4.40 3.70 Y 120 1 1 4.10 3.20 Y BT Group Mar 40,113 (7,022) (6,953) 4.25 3.25 Y 41,566 (5,856) (5,784) 4.20 3.30 Y Bunzl Dec 366 (70) (52) ND ND Y 336 (45) (30) ND ND Y Capita Dec 940 (193) (193) 3.75 3.00 Y 848 (118) (118) 4.50 3.30 Y Carnival Nov 374 7 7 3.85 3.20 Y 329 (4) (4) 4.40 3.40 Y Centrica Dec 6,444 62 111 3.90 3.00 Y 5,683 40 82 4.60 3.30 Y Coca-Cola HBC Dec 267 (112) (28) ND ND N 253 (91) (10) ND ND N Compass Group Sep 2,307 (176) 21 4.00 3.20 Y 2,149 (209) (24) 4.40 3.40 Y CRH Dec 1,594 (541) (495) 3.50 3.00 Y 1,929 (330) (291) 4.60 3.30 Y Diageo Jun 7,480 (473) (235) 4.20 3.30 Y 7,082 (536) (297) 4.60 3.30 Y
LCP Accounting for Pensions 2015 Appendix 1: FTSE 100 accounting disclosure listing 37 2014 Surplus/(deficit) Company Yearend Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 Direct Line Insurance Group Dec 83 4 4 3.40 3.10 Y Experian Mar 665 14 45 4.30 3.30 Y Fresnillo Dec 13 (9) (3) ND ND N Friends Life Dec 1,638 59 59 3.67 ND Y G4S Dec 2,040 (319) (264) 3.70 3.00 Y GKN Dec 2,627 (1,711) (1,095) 3.53 3.08 Y GlaxoSmithKline Dec 16,112 (1,689) (1,238) 3.60 3.00 Y Glencore Xstrata Dec 2,342 (686) (686) ND ND N Hammerson Dec 62 (40) (28) 3.60 3.10 N HSBC Holdings Dec 28,777 1,773 1,786 3.70 3.20 Y Imperial Tobacco Group Sep 3,094 (474) 28 4.00 3.20 Y InterContinental Hotels Group Dec 112 (71) (15) 3.70 3.30 Y International Airlines Group Dec 21,195 38 115 3.63 2.90 Y Intertek Group Dec 120 (25) (25) 3.60 ND Y ITV Dec 3,341 (346) (298) 3.60 3.03 Y Johnson Matthey Mar 1,456 (117) (117) 4.60 3.40 Y Kingfisher Feb 2,127 (100) (100) 4.40 3.30 Y Land Securities Group Mar 196 2 2 4.25 3.60 Y Legal & General Group 4 Dec 1,910 (494) (494) 3.60 3.10 Y Lloyds Banking Group Dec 38,133 890 890 3.67 2.95 Y London Stock Exchange Group 5 Mar 444 (23) (23) 4.50 3.40 Y London Stock Exchange Group 5 Dec 507 (24) (24) 3.70 3.10 Y Marks & Spencer Group Mar 6,729 200 201 4.45 3.40 Y Meggitt Dec 761 (271) (254) 3.60 3.10 Y Mondi Group Dec 110 (148) (36) ND ND N Morrison (Wm) Supermarkets Feb 3,094 (11) (11) 4.50 3.50 Y National Grid Mar 21,638 (1,276) (1,028) 4.30 3.30 Y 2013 Surplus/(deficit) Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 66 (2) (2) 4.40 3.50 Y 654 23 53 4.50 3.40 Y 14 (7) (2) ND ND N 1,410 (4) (4) 4.41 ND Y 1,660 (504) (472) 4.40 3.40 Y 2,532 (1,271) (763) 4.35 3.28 Y 15,225 (613) (207) 4.50 3.40 Y 2,207 (590) (590) ND ND N 58 (33) (21) 4.60 3.40 N 24,576 94 106 4.45 3.60 Y 2,924 (621) (162) 4.30 3.30 Y 445 (91) (11) 4.60 3.60 Y 19,109 (3) 65 4.55 3.28 Y 113 (13) (13) 4.50 ND Y 2,870 (445) (401) 4.53 3.38 Y 1,413 (195) (195) 4.50 3.40 Y 2,087 0 0 4.60 3.30 Y 193 6 6 4.30 3.50 Y 1,646 (464) (464) 4.40 3.50 Y 32,568 (787) (787) 4.60 3.30 Y 274 (26) (26) 4.50 3.40 Y NA NA NA NA NA NA 6,930 248 249 4.30 3.40 Y 688 (190) (177) 4.60 3.40 Y 100 (127) (32) ND ND N 2,839 (20) (20) 4.85 3.70 Y 21,770 (1,906) (1,640) 4.30 3.40 Y
38 LCP Accounting for Pensions 2015 Appendix 1: FTSE 100 accounting disclosure listing 2014 Surplus/(deficit) Company Yearend Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 Next Jan 668 70 80 4.28 3.38 Y Old Mutual Dec 621 107 107 ND ND N Pearson Dec 2,878 135 158 3.60 3.00 Y Persimmon Dec 506 (1) (1) 3.60 3.10 Y Prudential 4 Dec 8,067 755 755 3.50 3.00 Y RBS Dec 34,359 (2,284) (2,284) 3.70 3.00 Y Reckitt Benckiser Group Dec 1,650 (167) (43) 3.50 3.30 Y RELX Group Dec 4,345 (632) (439) 3.75 2.90 Y Rio Tinto Dec 9,755 (1,688) (1,058) 3.40 3.00 Y Rolls-Royce Holdings Dec 12,934 978 1,664 3.60 3.20 Y Royal Dutch Shell Dec 55,414 (6,739) (3,519) ND ND N Royal Mail Mar 3,833 1,736 1,736 4.50 3.40 Y RSA Insurance Group Dec 7,500 (98) 34 3.70 3.00 Y SABMiller Mar 287 (49) 44 ND ND N Sage Group (The) Sep 17 (14) (14) ND ND N Sainsbury (J) Mar 6,131 (737) (724) 4.25 3.40 Y Schroders Dec 988 104 104 3.60 3.30 Y Scottish & Southern Energy Mar 3,257 (437) (437) 4.30 3.60 Y Severn Trent Mar 1,824 (348) (339) 4.40 3.30 Y Smith & Nephew Dec 904 (115) (85) 3.70 3.00 Y Smiths Group Jul 3,800 (223) (135) 4.00 3.30 Y Sports Direct Apr 50 (15) (15) 4.30 3.40 Y Standard Chartered Dec 1,691 (234) (108) 3.60 ND Y Standard Life Dec 4,266 1,029 1,110 3.60 3.35 Y Taylor Wimpey Dec 2,004 (182) (182) 3.50 ND Y Tesco Feb 8,124 (3,193) (3,082) ND ND Y Travis Perkins Dec 1,155 (81) (81) 3.70 3.10 Y 2013 Surplus/(deficit) Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 609 66 74 4.50 3.38 Y 573 83 83 ND ND N 2,509 51 71 4.40 3.40 Y 457 24 24 4.40 3.40 Y 6,944 646 646 4.40 3.30 Y 28,488 (2,996) (2,996) 4.65 3.30 Y 1,458 (134) (23) 4.40 3.60 Y 3,981 (379) (219) 4.60 3.25 Y 9,409 (1,316) (710) 4.40 3.40 Y 10,280 93 676 4.40 3.50 Y 51,732 (2,183) 452 ND ND N 3,343 830 830 4.80 3.30 Y 6,566 (165) (44) 4.60 3.30 Y 299 (79) 49 ND ND N 17 (13) (13) ND ND Y 5,841 (632) (619) 4.60 3.45 Y 849 64 64 4.50 3.70 Y 3,118 (517) (517) 4.10 3.20 Y 1,724 (384) (374) 4.40 3.20 Y 817 (110) (86) 4.40 3.40 Y 3,696 (233) (146) 4.40 3.40 Y 47 (20) (20) 4.00 3.30 Y 1,563 (190) (88) 4.50 ND Y 3,244 561 632 4.60 3.70 Y 1,853 (182) (182) 4.60 ND Y 7,206 (2,378) (2,287) ND ND Y 1,027 0 0 4.70 3.40 Y
LCP Accounting for Pensions 2015 Appendix 1: FTSE 100 accounting disclosure listing 39 2014 Surplus/(deficit) 2013 Surplus/(deficit) Company Yearend Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 Market value of assets Total Funded schemes Discount rate % pa Inflation 1 % pa Disclosed mortality? 2 TUI Travel Sep 1,506 (699) (418) 3.90 3.30 Y 1,322 (661) (441) 4.40 3.30 Y Unilever Dec 15,895 (2,309) (1,418) 3.50 2.90 Y 15,283 (1,206) (337) 4.50 3.30 Y United Utilities Group Mar 2,377 (177) (177) 4.30 3.30 Y 2,442 15 15 4.60 3.30 Y Vodafone Group Mar 3,842 (549) (483) 4.20 3.20 Y 3,723 (528) (516) 4.30 3.30 Y Weir Group (The) Dec 6 742 (94) (85) 3.50 3.00 Y 681 (70) (63) 4.40 3.40 Y Whitbread Feb 1,571 (534) (534) 4.30 3.25 Y 1,480 (542) (542) 4.60 3.35 Y Wolseley Jul 1,384 7 56 4.30 3.30 Y 1,306 (133) (63) 4.50 3.40 Y WPP Dec 850 (295) (132) 3.40 ND Y 726 (247) (104) 4.50 ND Y Notes: 1 We have listed RPI as the measure of inflation and excluded CPI where it could be identified in the accounts. 2 This column indicates companies that disclosed sufficient information to calculate their assumption for life expectancy for a male pensioner in the UK. 3 The figures for BAE Systems exclude 1,444m of its 2014 deficit ( 1,029m in 2013) which is allocated to equity accounted investments and other participating employers. 4 Legal & General and Prudential hold group insurance policies in respect of some of their obligations. We have included the IAS19 value of these policies in the figures stated above, as follows: Legal & General: 723m (2013: 646m) and Prudential: 263m (2013: 257m). 5 London Stock Exchange Group changed its accounting year-end from March to December during 2014. We have included details of both the 31 March 2014 and 31 December 2014 disclosures in the table above, but have based all of the analysis in this report on the December accounts. 6 The most recent accounts for Weir Group cover the 52 week period ending on 2 January 2015 (the previous accounts cover the 53 week period ending on 3 January 2014). For the purposes of this report we have included the 2 January 2015 accounts with the 31 December 2014 year-end accounts of other FTSE 100 companies. The 2014 figures are as at the end of the accounting periods ending in 2014. The 2013 figures are as at the start of the accounting period. All figures shown above were taken from IAS19 disclosures. Figures have been converted to pounds sterling where a company has reported figures in its accounts in a different currency. Traditionally, some companies with overseas pension plans do not fund them via an external scheme, instead backing the pension plan with company assets, which may result in a larger deficit being disclosed. Where disclosed, the surplus/(deficit) attributable to funded schemes is also shown above. The discount rate and inflation assumption refer to those disclosed for the companies main UK scheme(s). Where a company has disclosed a range of assumptions, we have taken the mid-point. Where a company operates pension schemes in more than one country, we have considered the assumptions used for the UK if separately given. ND means no UK figures were disclosed. We have excluded from our survey the following 12 companies who had no evidence of significant defined benefit provision: Admiral Group, Antofagasta, ARM Holdings, British Sky Broadcasting, Burberry Group, Easyjet, Hargreaves Lansdown, Intu Properties, Randgold Resources, Shire, St James's Place and Tullow Oil. We have also exluded Dixons Carphone as no post-merger accounts were published for 2014. The following three companies have entered the FTSE 100 index since 31 December 2014 and hence are not included in our survey: Hikma Pharmaceuticals, Inmarsat and Merlin Entertainments. The following three companies have exited the FTSE 100 index since 31 December 2014: Aggreko, Friends Life and Tullow Oil.
40 LCP Accounting for Pensions 2015 Appendix 2: FTSE 100 accounting risk measures These tables show the key results of analysis of the disclosures made by the companies in the FTSE 100 as at 31 December 2014 that were reported in their 2014 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 2014. 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 Company 2014 Liabilities 2013 Liabilities Royal Dutch Shell 62,153 53,914 BT Group 47,135 47,422 Lloyds Banking Group 37,243 33,355 RBS 36,643 31,484 BP 33,648 29,569 BAE Systems¹ 30,506 25,943 Barclays 30,203 27,407 HSBC Holdings 27,004 24,483 National Grid 22,914 23,676 International Airlines Group 21,157 19,112 Largest deficits Company 2014 Deficit 2013 Deficit BT Group 7,022 5,856 Royal Dutch Shell 6,739 2,183 BP 5,507 3,486 BAE Systems 2 5,387 3,540 Tesco 3,193 2,378 Unilever 2,309 1,206 RBS 2,284 2,996 AstraZeneca 1,870 1,347 GKN 1,711 1,271 GlaxoSmithKline 1,689 613
LCP Accounting for Pensions 2015 Appendix 2: FTSE 100 accounting risk measures 41 Largest liabilities compared to market capitalisation Company Liabilities Market cap 2014 Liabilities/ Market cap % 2013 Liabilities/ Market cap % International Airlines Group 21,157 9,897 214 234 BAE Systems 1 30,506 14,929 204 184 RSA Insurance Group 7,598 4,372 174 200 BT Group 47,135 29,881 158 217 RBS 36,643 25,026 146 151 Sainsbury (J) 6,868 5,966 115 91 Aviva 13,170 14,269 92 92 Marks & Spencer Group 6,529 7,360 89 107 Smiths Group 4,023 4,998 80 72 GKN 4,338 5,603 77 63 Largest deficit compared to market capitalisation Company Deficit Market cap 2014 Deficit/ Market cap % 2013 Deficit/ Market cap % BAE Systems 2 5,387 14,929 36 25 GKN 1,711 5,603 31 21 BT Group 7,022 29,881 23 27 TUI Travel 699 4,351 16 16 Sainsbury (J) 737 5,966 12 9 Tesco 3,193 26,450 12 8 RBS 2,284 25,026 9 14 Severn Trent 348 4,340 8 9 G4S 319 4,312 7 12 BP 5,507 74,955 7 4 Highest funding level Company Assets Liabilities 2014 Assets/ Liabilities % 2013 Assets/ Liabilities % Royal Mail 3,833 2,097 183 133 Standard Life 4,266 3,237 132 121 3i 899 702 128 123 Old Mutual 621 514 121 117 Aviva 15,474 13,170 117 102 Next 668 597 112 112 Schroders 988 884 112 108 Prudential 3 8,067 7,312 110 110 Rolls-Royce Holdings 12,934 11,956 108 101 Ashtead Group 84 78 108 101
42 LCP Accounting for Pensions 2015 Appendix 2: FTSE 100 accounting risk measures Largest service cost 4 Company 2014 Service cost 2013 Service cost Royal Dutch Shell 1,120 1,212 BP 565 663 Tesco 542 482 Royal Mail 448 412 RBS 359 373 Barclays 319 375 BAE Systems 318 332 HSBC Holdings 304 71 Lloyds Banking Group 297 356 BT Group 272 225 Largest employer contributions Company 2014 Contributions 2013 Contributions Royal Dutch Shell 1,113 1,649 RBS 1,065 821 BP 760 814 BAE Systems 5 640 646 BT Group 553 542 Tesco 535 666 Lloyds Banking Group 531 804 International Airlines Group 483 479 Unilever 433 504 HSBC Holdings 410 601 Highest employer contributions compared to dividends paid 6 Company Contributions Dividends 2014 Contributions /Dividends % 2013 Contributions /Dividends % RSA Insurance Group 114 6 1,900 75 RBS 1,065 383 278 204 Lloyds Banking Group 531 314 169 3,216 Whitbread 62 62 100 48 BAE Systems 5 640 656 98 100 Babcock International Group 97 101 96 90 Meggitt 42 51 82 55 TUI Travel 117 153 76 47 BT Group 553 778 71 79 GKN 85 135 63 44
LCP Accounting for Pensions 2015 Appendix 2: FTSE 100 accounting risk measures 43 Largest employer contributions compared to service cost 4 Company Contributions Service cost 2014 Contributions less service cost 2013 Contributions less service cost RBS 1,065 359 706 448 Aviva 391 0 391 145 BAE Systems 5 640 318 322 314 International Airlines Group 483 164 318 449 BT Group 553 272 281 317 National Grid 409 150 259 289 Sainsbury (J) 127-124 251 78 Lloyds Banking Group 531 297 234 448 Unilever 433 209 224 324 Imperial Tobacco Group 116-72 188 48 Highest equity allocation 2014 Equity allocation % 2013 Equity allocation % Company Ashtead Group 70 67 Whitbread 60 59 Wolseley 59 66 Tesco 54 56 GlaxoSmithKline 53 53 BP 53 66 Travis Perkins 52 55 Next 51 49 Barratt Developments 48 47 Royal Dutch Shell 48 45 1 The figures for BAE Systems include all liabilities of the multi-employer plans that the group participates in. 2 The figures for BAE Systems exclude 1,444m of its 2014 deficit ( 1,029m in 2013) which is allocated to equity accounted investments and other participating employers. 3 Prudential holds group insurance policies in respect of some of its obligations. We have included the value of these policies in the asset figure stated above, which was 263m for 2014 (2013: 257m). 4 The service cost (representing the value of benefits earned over the accounting period) includes any curtailments and the value of any past service benefits awarded to members during the year. 5 The figures for BAE Systems do not include contributions by the employer in respect of employee salary sacrifice arrangements. 6 International Airlines Group, Royal Mail and Sports Direct did not pay a dividend during their 2013 or 2014 accounting years, but contributed 483m (2013: 503m), 407m (2013: 435m) and 3m (2013: 3m) to their pension schemes respectively.
LCP Accounting for Pensions 2015 Bob Scott Partner bob.scott@lcp.uk.com +44 (0)20 7439 2266 Nick Bunch Partner nick.bunch@lcp.uk.com +44 (0)20 7439 2266 LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. Lane Clark & Peacock LLP London, UK Tel: +44 (0)20 7439 2266 enquiries@lcp.uk.com Lane Clark & Peacock LLP Winchester, UK Tel: +44 (0)1962 870060 enquiries@lcp.uk.com Lane Clark & Peacock Belgium CVBA Brussels, Belgium Tel: +32 (0)2 761 45 45 info@lcpbe.com Lane Clark & Peacock Ireland Limited Dublin, Ireland Tel: +353 (0)1 614 43 93 enquiries@lcpireland.com Lane Clark & Peacock Netherlands B.V. Utrecht, Netherlands Tel: +31 (0)30 256 76 30 info@lcpnl.com Lane Clark & Peacock UAE Abu Dhabi, UAE Tel: +971 (0)2 658 7671 info@lcpgcc.com All rights to this document are reserved to Lane Clark & Peacock LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. We accept no liability to anyone to whom this document has been provided (with or without our consent). Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 95 Wigmore Street, London W1U 1DQ, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are licensed by the Institute and Faculty of Actuaries. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Lane Clark & Peacock UAE operates under legal name Lane Clark & Peacock Belgium Abu Dhabi, Foreign Branch of Belgium. Lane Clark & Peacock LLP 2015. UK c0815/0815