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£150bn to go backwards LCP Accounting for Pensions2017
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. This report is not intended to be an exhaustive analysis of
company reporting under 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, and from other publicly available information.
None of the companies have been contacted to provide additional explanation or further details.
© Lane Clark & Peacock LLP August 2017
Over the last 10 years, FTSE 100 companies have paid around £150bn into their defined benefit pension schemes, but their accounting position has worsened. How has this happened?
2 LCP Accounting for Pensions — 2017
Contents
4IntroductionFrom Bob Scott
At a glance summary
8Key findingsThe FTSE 100 accounting deficit
How have companies been managing their pension commitments?
Analysis of pension disclosures
24Key assumptionsLife expectancy
Discount rates and inflation
Increases in pensionable pay
34Setting accounting discount ratesLCP Treasury Model case study
36AppendicesFTSE 100 accounting disclosure listing
FTSE 100 accounting risk measures
3LCP Accounting for Pensions — 2017
IASB
The International Accounting Standards Board
4 LCP Accounting for Pensions — 2017
Welcome to our 24th annual survey of FTSE 100 companies’ pension disclosures.Since 2005, when the Pensions Regulator came into being, and particularly
since 2008 in the wake of the financial crisis, companies have been pressed to
pay ever higher contributions to fund their pension schemes. And FTSE 100
companies have responded to this pressure by contributing in excess of
£150 billion to their pension funds over the past 10 years.
Asset values have risen, from around £350 billion in 2007 to over £600 billion
today, reflecting a healthy compound growth rate of over 6% pa, after allowance
is made for net benefit payments of around £50 billion. And yet the accounts
of FTSE 100 companies show that they still have a collective pensions deficit –
around £17 billion as at 30 June 2017. The reason for this is that liability values
have grown even more quickly. And, if the IASB gets its way, IFRIC 14 could
mean companies being required to disclose even larger pension liabilities on
their balance sheets.
For some companies, the increase in liability values has been remarkable.
The same factors that have driven up liability values have also seen the cost of
providing final salary pensions rise to unprecedented levels. A company that
provides its employees with a traditional “1/60th” scheme, with full indexation
and survivors’ benefits, would face a current accounting cost in excess of 50%
of salaries.
Companies also face increased costs from other quarters, including the national
living wage, the apprenticeship levy and, for those who have been paying
minimum auto-enrolment contributions, an increase from 1% to 3% over the
next two years in the required rate. Not to mention risks arising from the Brexit
process.
As a result, it is not surprising that companies are increasingly looking for
ways to minimise the amount they are required to contribute in the short
term to support their legacy defined benefit arrangements, and to optimise
the way that their pension liabilities are presented in their accounts. To avoid
over-stating their liabilities, we’ve seen a number of initiatives to address this,
including adopting new methods of setting accounting assumptions (see
page 34), modifying assumptions about how long members will live, closing
to further accrual and implementing non-cash solutions to provide security to
pension schemes.
1. Introduction
BT Group disclosed pension liabilities of
£60 billion in its March 2017 accounts, up from
£50 billion a year earlier.
5LCP Accounting for Pensions — 2017
1. Introductioncontinued
The debate continues as to whether people are saving enough. Whilst many companies no doubt wish to help all their employees save, some may be limited in what they can do.
Meanwhile, the debate continues as to whether people are saving enough.
Whilst many companies no doubt wish to help all their employees save, some
may be limited in what they can do by the need to pay substantial amounts to
cover the deficit in their defined benefit scheme and by the lack of an accepted
“middle ground” pension arrangement that comes at an affordable cost.
It is not only Frank Field who has expressed concern about shareholders
getting a bigger slice of the cake than the pension scheme does. And, despite
their persistent deficits, FTSE 100 companies were still able to pay four times
as much in dividends in 2016 as they did in pension contributions. Indeed, if
we exclude the £4.2 billion paid by RBS to its pension scheme as a one-off
contribution, dividends were more than 5 times the pension contributions paid.
Looking just at companies with 31 December year-ends, 39 declared pensions
deficits totalling £37 billion. Those same companies paid out £39 billion in
dividends during 2016.
Signs are that the Pensions Regulator will get tougher with companies that
unduly prioritise their shareholders. Let's hope that any extra contributions that
companies pay in future will have a bigger impact on the pensions deficit than
in recent years.
“Bugger the share price, what about this pension liability?”Frank Field MP
Bob Scott Partner
Watch Bob Scott discuss the key findings of the report at vimeo.com/lcpactuaries/afp2017
Pension schemes versus shareholders
Assumed life expectancy falls
See page 21 See page 26
28FTSE 100 companies paid
four times as much in dividends in 2016
as they did in contributions
to their defined benefit
pension schemes.
companies reduced their
assumed life expectancy
(on average the difference
was half a year).
£150bn for funding levels to go backwards
Over the last 10 years, FTSE 100 companies
have paid around £150 billion into their defined
benefit pension schemes…
Placing the blame on liability values
Liability values rose by more than 85%.
See page 9
See page 9
See page 10
2007
2016 2015
2007
2017
2017 2016
2017
£12bnsurplus
£46bn £13.3bn
£336bn
£17bndeficit
£17bn £17.3bn
£625bn
1. Introductioncontinued
Deficit 2016 vs 2017Contributions by FTSE 100 companies into their defined benefit schemes
The improvement in
the net deficit is due
to strong returns on
assets and a record
level of contributions.
…but the continued
rise in liability values
has meant that the net
accounting position
has worsened.
Accounting deficit in respect of UK pension liabilities
See page 20
Highest contribution amount ever
6 LCP Accounting for Pensions — 2017
FTSE 100 pensions at a glance
The DB vs DC savings gap
The trend to reduce investment risk
See page 12
Switching from RPI to CPI
The liability for FTSE 100 companies would be
£30bn lower, if those using RPI for increasing benefits each year were able to switch to CPI.
See page 32
No traditional pensions for new employees
See page 12
Liabilities may be being overstated
If the FTSE 100 were all to adopt
the LCP Treasury Model to set their
discount rate the combined accounting
liability for pensions would reduce by
£25bn
55% 3%
See the case study on page 34
The typical accounting cost of a traditional final salary pension scheme is now
But for DC auto enrolment FTSE 100 companies will only have to pay a minimum of
in 2015to
in 201628% 26%
27
1. Introductioncontinued
still provide traditional final salary accrual for a reducing number of their longest serving employees…
...but none offer this to new recruits.
The average allocation to equities has continued to reduce
Many of the FTSE 100 now also have significant hedging strategies in place in their pension schemes to protect against the impact of changes in bond yields.
of salaries
of salaries
See page 15
7LCP Accounting for Pensions — 2017
2. Key Findings
In this report we have analysed 89 FTSE 100 companies reporting in 2016.
11 companies have been excluded as they do not sponsor a material defined
benefit pension scheme. A full list and summary details of the 89 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 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.
All of the companies analysed have reported under international accounting
standards (IAS19 for pension costs) as currently required under EU regulations.
Bob ScottPartner
8 LCP Accounting for Pensions — 2017
It is not surprising that companies are increasingly looking for ways to minimise the amounts they are required to contribute in the short term to support their legacy defined benefit arrangements.
2. Key findingscontinued
Following the Brexit vote last year, the deficit increased to almost £80 billion at
the end of August 2016 – the highest level since 2009 – before steadily reducing
over the remainder of 2016 and the first half of 2017.
Overall, this has resulted in the total net deficit reducing by £29 billion from the
position at 31 July 2016 disclosed in last year’s report.
The FTSE 100 accounting deficitWe estimate that the combined FTSE 100 pension deficit in respect of UK
liabilities was £17 billion at the end of June 2017, reflecting total IAS19 liabilities
of £625 billion against assets of £608 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. We have also excluded the
impact of any adjustment arising from balance sheet asset limits or funding
requirements.
Estimated IAS19 position for UK schemes of FTSE 100 companies
the combined FTSE 100 pension deficit in respect of UK liabilities.
£17bn
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
Jun
2012
Dec
20
12
Jun
2013
Dec
20
13
Jun
2014
Dec
20
14
Jun
2015
Dec
20
15
Jun
2016
Dec
20
16
Jun
2017
£ b
illio
n
9LCP Accounting for Pensions — 2017
In late 2008 the yield on the iBoxx AA over 15 year corporate bond index
peaked at more than 7.5% pa. However, since then there has been a steady
fall in yields – with the index hitting a low of just under 2% pa in August 2016.
Although yields then rose sharply, the general downward trend began again in
early 2017.
This fall in bond yields has led to a sustained rise in liability values that has
meant that many companies continue to disclose an IAS19 deficit despite
paying significant amounts into their pension schemes. Ten years ago
FTSE 100 companies had a net pension surplus of £12 billion, based on total UK
accounting liabilities of £336 billion. Since then companies have paid over
£150 billion into their pension schemes, but with liability values rising by more
than 85%, they now find themselves with a net accounting deficit of £17 billion.
Source: iBoxx
2. Key findingscontinued
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
1%
2%
3%
4%
5%
6%
7%
8%
December
2007
December
2008
December
2009
December
2010
December
2011
December
2012
December
2013
December
2014
December
2015
December
2016
Nom
inal
ann
ual y
ield
(%
pa)
has been paid by FTSE 100 companies into their defined benefit pension schemes over the past 10 years.
£150bn
10 LCP Accounting for Pensions — 2017
2. Key findingscontinued
For individual companies, the impact could be very different depending on the
level of hedging their pension schemes have in place. Most of the FTSE 100's
pension schemes are now relatively well hedged against the impact of changes
in bond yields on liability values, but very few will have had this hedging in
place since 2007.
Increasingly companies are looking for other ways to mitigate the increase in
liability values when preparing their accounting disclosures – for example, by
adopting improved methods of setting their accounting assumptions, such as
through LCP’s Treasury Model for setting discount rates. See the case study on
page 34 for further details.
How have companies been managing their pension commitments?
Reductions in defined benefit pension provision
None of the companies we have analysed provide traditional final salary
pensions to new employees. However, there are currently four FTSE 100
companies that provide some form of defined benefit pension provision as
standard to new recruits:
• Croda International provides a career average revalued earrings (CARE) scheme.
• Diageo, Johnson Matthey and Morrisons all provide cash balance schemes.
The following companies disclosed in their accounts that they had either closed
their defined benefit pension schemes to future accrual, or planned to do so in
the near future:
• ITV closed the defined benefit sections of its pension scheme to future benefit accrual with effect from 28 February 2017.
• Smith & Nephew closed its UK pension plan to future accrual in December 2016, resulting in a $44 million gain being disclosed in its 2016 accounts.
• Carnival announced that the multi-employer pension scheme it participates in was fully closed to future accrual in March 2016.
• In its 2017 accounts, Royal Mail has announced that it will close its pension scheme to future accrual with effect from 31 March 2018, by which point it expects its current surplus will have been fully used to meet additional benefit accrual.
• GKN has recently announced that it has closed its defined benefit pension scheme to future accrual.
In addition, Marks & Spencer had previously announced that it would close its
defined benefit scheme to future accrual during 2016 and Standard Life had
announced that it would close its defined benefit pension plan to future accrual
in April 2016.
11LCP Accounting for Pensions — 2017
After allowing for these changes, only half of the FTSE 100 continue to provide
any form of ongoing defined benefit accrual to any of their UK employees, with
the split of pension provision illustrated in the chart below. This shows that only
27 FTSE 100 companies continue to provide traditional final salary pensions to
any of their UK employees.
Number of FTSE 100 companies providing continuing defined benefit pension provision
No defined benefit (DB) scheme
Non-UK DB scheme only
UK DB scheme closed to accrual
UK DB scheme - traditional final salary
UK DB scheme - final salary, with cap on salary increases
UK DB scheme - non-final salary
11
34
27
11
11
6
Even where companies are continuing to provide ongoing defined benefit accrual,
this will be for a dwindling number of employees, as most companies closed their
defined benefit pension schemes to new employees many years ago.
Pension scheme closures to future accrual have been driven in part by the
increasing cost of provided a defined benefit pension. The chart below
illustrates how the IAS19 cost of accrual in a typical 60ths final salary scheme
would have risen due to changes in yields and longevity assumptions over the
last 8 years, with the cost more than doubling over this period.
IAS19 cost of accrual in a typical 60ths final salary scheme
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
Jul2009
Jul2010
Jul2011
Jul2012
Jul2013
Jul2014
Jul2015
Jul2016
Jul2017
% o
f sal
arie
s
2. Key findingscontinued
12 LCP Accounting for Pensions — 2017
We expect to see more closures of DB pension schemes in the coming years.
However, as the number of employees in DB pension schemes continues to fall
naturally - due to retirements and employee turnover - some employers may
be willing to absorb the high cost for an increasingly small group of employees,
rather than spend time and money on a formal closure exercise.
Where companies have chosen not to close their pension schemes to future
accrual, many have made other changes to limit the cost of the additional
liabilities being built up:
• Babcock disclosed several changes to its pension schemes in its 2016 accounts, including a cap on pensionable salaries. In its 2017 accounts it stated that it will be consulting with employees of its two largest schemes on changes to better share costs.
• Centrica has introduced a reduced pensionable salary cap for two of its pension schemes resulting in an £80 million accounting gain. Member contributions have also been increased and inflationary increases for future pension accrual have been reduced to the lower of CPI inflation and 2.5% pa.
• Croda changed its UK pension scheme from a final salary basis to a career average revalued earnings (CARE) scheme with effect from April 2016, with pensionable earnings capped at £65,000 pa. In addition, indexation of pensions in payment for future accrual has been moved from RPI to CPI inflation.
• In October 2016 RBS announced that it would be increasing employee contributions in its UK defined benefit pension schemes by 2% of salary.
As mentioned in previous Accounting for Pensions reports, in 2010 the
Government changed the measure of inflation applying for statutory minimum
increases to pensions from RPI inflation to CPI inflation. Depending on the
precise wording of pension scheme rules, this resulted in an immediate one-off
reduction to many companies' pension liabilities.
Despite this change being announced more than seven years ago, the issue of
which inflation measure to apply for pension increases continues. A number
of court cases are currently in progress and International Airlines Group has
recently lost legal action against the trustees of the British Airways pension
scheme who granted a discretionary increase on top of the CPI inflation
increase required by the rules.
2. Key findingscontinued
13LCP Accounting for Pensions — 2017
Managing pension risk
As well as stopping the build-up of further defined benefit pensions, FTSE 100
companies have been looking at ways of reducing the risk associated with
the pensions that have already been promised to their current and former
employees.
Liability management exercises have been a relatively common way of
achieving this in recent years. For example, under a pension increase exchange
(“PIE”) exercise, pension scheme members are offered a higher level of pension
in exchange for giving up some, or all, of the future increases that they would
be entitled to – thereby removing inflation risk from the pension scheme. These
exercises can also result in a saving to the employer depending on the terms of
the exercise.
In 2016, two FTSE 100 companies disclosed that they had completed, or would
shortly be completing, a pension increase exercise:
• During 2016 AstraZeneca carried out a PIE exercise which resulted in a £54 million past service credit being disclosed in its 2016 accounts.
• Vodafone disclosed that its main UK defined benefit scheme would be carrying out a PIE exercise between May and August 2016.
As pension schemes mature and the time horizon for benefit payments
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
2. Key findingscontinued
14 LCP Accounting for Pensions — 2017
Although this shows that around 55% of pension scheme assets are now
invested in bonds, many pension schemes have used derivatives to put in place
additional hedging to protect their funding position against changes in interest
rates.
0%
20%
40%
60%
80%
100%
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
Dec
-15
Dec
-16
OtherBondsEquities
2. Key findingscontinued
FTSE 100 pension scheme assets into different asset classes. 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 2016. This is illustrated in the chart below.
Overall asset allocation for FTSE 100 companies with December year-ends
of pension scheme assets are now invested in bonds.
55%
15LCP Accounting for Pensions — 2017
Pension risk disclosure
Since we started our Accounting for Pensions survey 24 years ago, the reporting
of pension risk in listed companies’ accounts has improved hugely. The revised
disclosures required under the updated 2011 version of IAS19 have helped in this
regard, but some companies are still not disclosing sufficient detail for informed
investors to understand the level of pension risk they are running. For example
Royal Dutch Shell has pension assets of over £60 billion but provides very little
detail on how these assets are invested.
The introduction of viability statements following updates to the Corporate
Governance Code in October 2014 was expected to improve the prominence
of disclosure of material pension risks in company accounts. However, in 2016
only four FTSE 100 companies referred to pensions directly in their viability
statements – this is despite some of these companies having a pension scheme
which is larger than the size of the business.
2. Key findingscontinued
In 2016 only four FTSE 100 companies referred to pensions directly in their viability statements.
16 LCP Accounting for Pensions — 2017
Analysis of pension disclosuresThe average pensions note runs to just under five pages, with most companies
also having several paragraphs of pension commentary in the main body of
their reports. The longest disclosures were made by National Grid, with 11 pages
of its 2016 report dedicated to pensions, whilst BAE Systems, CRH and ITV all
gave 10 pages of pensions information.
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 agreement in
place with the pension scheme's trustees.
Of the companies we have analysed, 19 were affected by this issue in 2016,
which is the same number as in 2015. Notably, in 2016 RBS changed its policy
in this area and as a result disclosed an additional £3.0 billion liability on its
balance sheet in respect of its main pension scheme.
The International Accounting Standard Board is currently finalising amendments
to this aspect of pensions accounting, which it expects to issue around the end
of 2017. Depending on the details, this could result in material changes in the
amount that companies need to disclose on their balance sheet in future.
However, this complexity aside, of the 89 FTSE 100 companies with material
defined benefit pension schemes:
• 31 disclosed that their funding level had improved since 2015;
• 25 disclosed an accounting surplus, compared to 27 last year; and
• 41 companies reported being less than 90% funded on an accounting basis at their 2016 year-end compared with 31 in 2015.
As was the case last year, Royal Mail disclosed the highest funding level – 193%
as at 27 March 2016, although this had decreased to a funding level of 164% at
26 March 2017.
2. Key findingscontinued
FTSE 100 companies reported being less than 90% funded on an accounting basis.
41
17LCP Accounting for Pensions — 2017
Changes over 2016
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 2016
year-ends.
Ratio of assets to IAS19 liabilities at end December (%)
Ratio of assets to IAS19 liabilities at end March (%)
The average reported IAS19 funding level for companies with December
year-ends was 89% in 2016, representing a decrease from 94% in 2015. This
change in funding position reflects a decrease in corporate bond yields (and an
increase in liability values) for companies reporting at 31 December 2016, offset
for the most part by strong investment returns.
We have shown a similar chart for those companies with March year-ends below.
The average reported IAS19 funding level for these companies was 102% at
March 2017 compared with 106% in 2016 and 103% in 2015.
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
ber
of c
ompa
nies
December 2015
December 2016
0
1
2
3
4
5
6
7
8
9
under 80 80 to 89 90 to 99 100 to 109 110 or over
Num
ber
of c
ompa
nies
March 2015 March 2016 March 2017
2. Key findingscontinued
18 LCP Accounting for Pensions — 2017
Benefits earned
Net interest charged
Investment experience& exchange rate dierences
New assumptions & experience Overall movement
in the deficit
100 80 60 40 20 0 20 40 60 80
Factors incresasing deficit Factors decreasing deficit
Contributions
IAS19 sources of deficits and surpluses for companies with December year-ends only (£ billion)
Sources of deficits and surpluses
For the 52 companies with December year-ends, worldwide deficits increased
by £10.1 billion over 2016. This is illustrated in the chart below.
Our analysis shows that contributions paid (£13.0 billion) more than covered the
net IAS19 value of benefits earned over the year (£4.9 billion) and the total net
interest charge (£0.6 billion). However, increases in IAS19 liability values
(£74.5 billion), mainly caused by lower corporate bond yields, were only
partially offset by strong investment returns (£56.9 billion).
Overall, this has led to an increase in deficits of £10.1 billion for these companies.
2. Key findingscontinued
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 company’s pension liability was
38% of its market capitalisation, which is an increase from 34% last year.
Accounting liabilities as a proportion of market capitalisation (%)
2015
2016
0
5
10
15
20
25
30
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
Num
ber
of c
ompa
nies
is the average FTSE 100 company’s pension liability as a percentage of its market capitalisation.
38%
19LCP Accounting for Pensions — 2017
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
£ b
illio
n
Deficit contributions(defined benefit)
Employer service cost(defined benefit)
Employer definedcontribution costs
Pension schemes continue to pose a very significant risk for certain companies.
For example:
• BAE Systems had pension liabilities of more than 170% of its market capitalisation at its 2016 year-end, and the deficit in its pension scheme was 33% of the value of the company;
• International Airlines Group has pension liabilities of 268% of its market cap (although the deficit was only 7% of the company’s value); and
• GKN had pension liabilities of 80% of its market cap, with the deficit representing 34% of the company’s value.
On average, pension scheme deficits were 4% of market capitalisation which is
the same as in 2015.
We have highlighted the 10 companies with largest liabilities and largest deficit
compared to market capitalisation in appendix 2.
What have companies done to tackle their deficits?
FTSE 100 companies paid contributions totalling £17.3 billion to their defined
benefit schemes in 2016 – the highest amount ever paid. This follows £13.3 billion
of contributions paid in 2015, £12.5 billion paid in 2014 and £14.8 billion paid in
2013.
The chart below shows how company payments, including those to defined
contribution pension schemes, have changed since 2007. We expect to see
contributions to defined contribution schemes become a larger proportion
of the total in future years, as the remaining employees with accrued defined
benefit pensions retire and new employees are, in most cases, auto-enrolled into
DC schemes.
2. Key findingscontinued
Employer contributions to pension schemes
is the level of contributions paid by FTSE 100 companies to their defined benefit schemes in 2016 - the highest amount ever paid.
£17bn
20 LCP Accounting for Pensions — 2017
The increase in total contributions for 2016 is largely due to a £4.2 billion
contribution made by RBS to its main UK pension scheme, which is the largest
ever one-off pension payment made by a UK company. Overall, fewer than half
of the FTSE 100 paid higher contributions during 2016 than in 2015.
The 10 companies that paid the highest contributions to their defined benefit
schemes are shown in appendix 2. BT Group and RBS were the only two
companies to pay more than £1 billion into their DB schemes over their 2016
accounting year. These were also the only two companies to pay more than
£1 billion in 2015.
A comparison of how contributions to defined benefit schemes has compared to
dividends is shown in the chart below.
Employer contributions to DB pension schemes vs dividends
2. Key findingscontinued
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.
0
1
2
3
4
5
6
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Div
iden
ds /
DB
pen
sion
con
trib
utio
ns
£ b
illio
n
Contributions to DB pension schemesDividendsDividends/pension contributions
21LCP Accounting for Pensions — 2017
19 companies paid contributions that were less than or equal to the IAS19 value
of benefits promised over the year. These were:
• Ashtead Group, Morrisons, Next, Royal Mail, Schroders and Standard Life, which all disclosed an IAS19 surplus; and
• Associated British Foods, BHP Billiton, BP, ConvaTec Group, Informa, Micro Focus, Mondi Group, Royal Dutch Shell, Sage Group, Shire, Sky, Vodafone and Taylor Wimpey which all disclosed an IAS19 deficit.
The chart below shows the length of time it would take for IAS19 deficits to be
removed if companies paid contributions at the same rates as they did in 2016
and investments earned returns in line with the IAS19 discount rates. This is an
artificial calculation as IAS19 is not a funding basis. Nevertheless it provides a
way of comparing IAS19 deficits with the contributions paid.
Pension schemes versus shareholders
The following chart shows how pension deficits compare to dividends paid.
Of the 63 FTSE 100 companies that disclosed a pension deficit in 2016, 24
disclosed a deficit that was greater than or equal to the dividends paid to
their shareholders in 2016. However, in 23 cases, the 2016 dividend was more
than double the deficit at the 2016 financial year-end, suggesting that these
companies could pay off their pension scheme deficit relatively easily if they
wanted to. The total deficit for these 63 companies was £53.4 billion, marginally
lower than the total dividends paid of £54.8 billion.
2. Key findingscontinued
Expected time to pay off IAS19 deficits
2015
2016
0
5
10
15
20
25
30
0 or 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
Num
ber
of c
ompa
nies
FTSE 100 companies paid four times as much in dividends in 2016 as they did in contributions to their defined benefit pension schemes.
22 LCP Accounting for Pensions — 2017
The chart below shows the company contributions paid over the 2016 and 2015
accounting years as a percentage of dividends distributed over these periods.
In 2016, seven companies paid more contributions to their pension schemes
than they distributed in dividends, compared to five of these companies in 2015.
2015
2016
0
5
10
15
20
under 50 50 to 99 100 to149
150 to199
200 to249
250 to299
300 to349
350 to399
400 orover
Num
ber
of c
ompa
nies
2015
2016
0
5
10
15
20
25
30
35
40
45
under 10
10 to19
20 to29
30 to39
40 to49
50 to59
60 to69
70 to79
80 to89
90 to99
100 orover
Num
ber
of c
ompa
nies
2. Key findingscontinued
Percentage of IAS19 deficit that could be paid off with dividends paid in accounting year (%)
Contributions paid as a proportion of dividends paid (%)
This is an area that has come under more scrutiny following the collapse of BHS.
In its 2017 annual funding statement, The Pensions Regulator has stated that it will consider investigating schemes where there is a funding deficit and the total distribution to shareholders is higher that the level of contributions being paid to remove the deficit, unless:
• the deficit is expected to be removed over a relatively short period; and
• the scheme has a low risk investment strategy.
23LCP Accounting for Pensions — 2017
3. Key assumptions
In this section we consider the various assumptions used to place a value on
pension benefits under IAS19. 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.
Nick BunchPartner
24 LCP Accounting for Pensions — 2017
FTSE 100 companies have been modifying their assumptions about how long their pension scheme members will live, reflecting data that shows there have been more deaths in England & Wales in recent years than previously expected.
3. Key assumptionscontinued
Life expectancy Under the IAS19 accounting standard, companies are required to disclose
any “significant actuarial assumptions” and we would generally expect this
to include mortality. 71 of 89 companies have provided sufficient information
in their 2016 accounts for us to derive basic mortality statistics – specifically
the life expectancy for a man at age 65 in the UK. The same companies also
provided this information in 2015. Of the remaining 18, all but BHP Billiton, ConvaTec, Croda, Old Mutual, Shire and Sky 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.
The average assumed age at death was 87.9 years, which is marginally lower
than in these companies’ 2015 accounts where the average was 88.0 years.
Life expectancy assumptions reported in 2016 UK males aged 65 on the accounting date
2015
2016
0
5
10
15
20
25
30
85.9 or less 86 to 86.9 87 to 87.9 88 to 88.9 89 to 89.9 90 or above
Num
ber
of c
ompa
nies
25LCP Accounting for Pensions — 2017
3. Key assumptionscontinued
In the last few years we have noted that the rate of increase in assumed life
expectancy has been slowing and this trend has continued in 2016. To some
extent this reflects UK mortality data which has shown there have been more
deaths than expected in recent years. Whether this proves to be a long-term
trend remains to be seen.
In 2016, 28 companies disclosed lower assumed life expectancy for some or all
of their scheme membership than in 2015, reducing their average assumption by
0.5 years. 30 companies disclosed higher life expectancy assumptions, adding
0.2 years on average.
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 assumed age at death
for a UK male aged 65 for each sector. The vertical lines show the extent of the
variation within each sector, which in most cases increases with the greater the
number of companies within the sector.
Life expectancy assumptions reported in 2016 split by sector UK males aged 65 on accounting date
This chart shows that the highest average assumed life expectancies are found
in the healthcare and financials sectors. The lowest average assumed life
expectancy was found in the industrials sector.
82
84
86
88
90
92
Hea
lthc
are:
3 co
mp
anie
s
Fin
anci
als:
17 c
om
pan
ies
Oil
& G
as:
1 co
mp
any
Uti
litie
s:5
com
pan
ies
Bas
ic M
ater
ials
:2
com
pan
ies
Tel
eco
mm
unic
atio
ns:
2 co
mp
anie
s
Co
nsum
er S
ervi
ces:
18 c
om
pan
ies
Co
nsum
er G
oo
ds:
10 c
om
pan
ies
Ind
ustr
ials
:13
co
mp
anie
s
Age
at d
eath
2015
2016
FTSE 100 companies lowered their assumed life expectancy for their scheme membership in 2016.
28
26 LCP Accounting for Pensions — 2017
3. Key assumptionscontinued
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.
69 companies disclosed enough information in their accounts to analyse how
their allowance for future improvements in mortality has changed compared to
2015. The chart below shows the allowance that these companies have made for
increases to life expectancy over the next 20 years.
Additional life expectancy improvements reported in 2016 Improvements for UK male members aged 65 now versus aged 65 in 2036
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 for these companies in 2015.
Overall, these companies decreased their average assumption for the life
expectancy of a 65 year old in 2036 by 0.1 years, from an assumed age at death
of 89.8 years in their 2015 accounts to 89.7 years in 2016.
2015
2016
0
5
10
15
20
25
30
35
under 0.5years
0.5 to 0.99years
1 to 1.49years
1.5 to 1.99years
2 to 2.49years
2.5 to 2.99years
3 to 3.49years
3.5 years or over
Num
ber
of c
ompa
nies
Increase in life expectancy over next 20 years
27LCP Accounting for Pensions — 2017
3. Key assumptionscontinued
Discount rates and inflationThe discount rate is used to calculate a present value of the projected pension
benefits. A lower discount rate means a higher IAS19 value of pension liabilities
and vice versa.
The typical FTSE 100 company has pension liabilities that are linked to price
inflation. A decrease in the price inflation assumption will lead to a lower level
of projected benefit payments, and hence a lower IAS19 value being placed on
those benefits, all other things being equal.
We have analysed the discount rates used by 43 companies and the RPI inflation
assumption of 37 companies with a December year-end, together with the
assumption for CPI inflation disclosed by 20 of these companies. Similarly,
we have analysed the discount rates and the RPI inflation assumption of 15
companies with a March 2017 year-end, together with the assumption for CPI
inflation disclosed by 9 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 2015, December 2016 and March 2017 (% pa)
0
5
10
15
20
25
under2.5
2.5 to2.59
2.6 to2.69
2.7 to2.79
2.8 to2.89
2.9 to2.99
3.0 to3.09
3.1 to3.19
3.2 to3.29
3.3 to3.39
3.4 to3.49
3.5 to3.59
3.6 to3.69
3.7 to3.79
3.8 to3.89
3.9 to3.99
4.0 orover
Num
ber
of c
ompa
nies
December 2015
December 2016
March 2017
28 LCP Accounting for Pensions — 2017
The average discount rate decreased markedly over the year, from 3.8% pa in
December 2015 to 2.7% pa in December 2016. The average discount rate used by
FTSE 100 companies with a March 2017 year-end was even lower at 2.5% pa.
The spread of discount rates used by FTSE 100 companies with a
December 2016 year-end has stayed the same compared to December 2015,
with a 0.4% spread of rates at both dates.
Hammerson disclosed the highest discount rate for a FTSE 100 company with a
December year-end in their 2016 accounts (2.9% pa in 2016 compared to
3.8% pa in 2015). Aviva, HSBC, Pearson and WPP adopted the lowest discount
rate of 2.5% pa.
IAS19 requires companies to disclose the duration of their pensions liabilities,
allowing us to compare the discount rates used against the duration of the
scheme, as shown in the chart below.
Discount rates used at 31 December 2016 by duration
Most companies use the same assumptions to value both past service and
future service benefits. However, BP, GKN and ITV all disclosed the use of
different assumptions to calculate the “service cost” item in their accounts,
which represents the value of pension benefits accrued over the accounting
year. By reflecting the longer duration of accruing benefits compared to accrued
benefits, companies could assume discount rates that were, on average, higher
by 0.1% pa. This meant they could disclose a lower service cost, and higher
profits, than would otherwise have been the case.
AstraZeneca announced in its 2016 accounts that it will be moving to a similar
discounting along the curve approach from 2017.
3. Key assumptionscontinued
0%
1%
2%
3%
4%
0 5 10 15 20 25
Yiel
d / d
isco
unt r
ate
Duration
AA rated corporate bonds Discount rates
29LCP Accounting for Pensions — 2017
Inflation (RPI assumptions)
The chart below shows long-term inflation assumptions as measured by the
Retail Prices Index (RPI). The average RPI assumption of 3.3% pa in
December 2016 and March 2017 was an increase from the average of 3.1% pa in
December 2015.
RPI inflation used in December 2015, December 2016 and March 2017 (% pa)
3. Key assumptionscontinued
December 2015
December 2016
March 2017
0
5
10
15
20
Under 3.0 3.0 to 3.09 3.1 to 3.19 3.2 to 3.29 3.3 to 3.39 3.4 to 3.49 3.5 to 3.59 3.6 or over
Num
ber
of c
ompa
nies
Setting accounting discount rates
See page 34 for our LCP Treasury
Model case study.
For December 2016 year-ends, the highest RPI inflation assumption was
3.6% pa, adopted by Reckitt Benckiser Group. At the other extreme 10
companies, AstraZeneca, BAE Systems, BP, Centrica, GlaxoSmithKline, International Airlines Group, Persimmon, Prudential, RBS and Unilever adopted assumptions of 3.2% pa. In general, the December 2016 RPI inflation
assumptions had a similar spread to those used in 2015.
In current market conditions, the use of a higher rate is arguably technically
more correct on the basis that corporate bond yields generally increase as the
term of the bond increases (illustrated in the chart on the previous page), and
the duration of future service liabilities accruing for active members will be
longer than the duration of the liabilities already accrued.
30 LCP Accounting for Pensions — 2017
The Bank of England has historically published 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 2016.
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 2015, 31 December 2016 and 31 March 2017. It shows that the net
discount rate has decreased since December 2015, from an average of
0.7% pa to -0.6% pa at 31 December 2016. In March 2017 this had decreased
again to -0.7% pa.
Discount rates in excess of RPI inflation used in December 2015, December 2016 and March 2017 (% pa)
3. Key assumptionscontinued
0
5
10
15
20
under-0.8
-0.8 to-0.61
-0.6 to-0.41
-0.4 to-0.21
-0.2 to-0.01
0 to0.19
0.2 to0.39
0.4 to0.59
0.6 to0.79
0.8 to0.99
1.0 orover
Num
ber
of c
ompa
nies December 2015
December 2016
March 2017
31LCP Accounting for Pensions — 2017
3. Key assumptionscontinued
Difference in RPI and CPI inflation assumptions used in December 2015, December 2016 and March 2017 (% pa)
December 2015
December 2016
March 2017
0
5
10
15
under 0.8 0.8 to 0.89 0.9 to 0.99 1 to 1.09 1.1 to 1.19 1.2 or over
Num
ber
of c
ompa
nies
Inflation (CPI) assumptions
Since 2010 the statutory minimum increases that pension schemes must
provide has been linked to the Consumer Prices Index (“CPI”) rather than 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.
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 2015, December 2016 and
March 2017 year-end accounts, where such information was available.
32 LCP Accounting for Pensions — 2017
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 reduced to 0% pa from 0.1% in 2015. Many companies
now have caps on, or have even frozen, increases in pensionable salary and as a
result disclosed a salary increase assumption lower than RPI inflation.
Pensionable pay growth rates used in excess of RPI inflation (% pa)
As the number of active members in final salary pension schemes has reduced,
the assumption for salary growth has become less significant.
At 31 December 2016 the average margin was 1.0% pa which is unchanged from
31 December 2015. At 31 December 2016, Aviva, International Airlines Group, Persimmon, Provident Financial, Schroders, Rio Tinto, Rolls Royce and RSA
used a long-term CPI inflation assumption of 1.1% pa below their RPI inflation
assumption, the largest margin at that accounting date, whilst at 31 March 2017
BT Group has a long term assumption that CPI inflation would be 1.2% pa below
RPI inflation.
3. Key assumptionscontinued
2015
2016
0
5
10
15
20
25
30
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 2.25 or over
Num
ber
of c
ompa
nies
33LCP Accounting for Pensions — 2017
What would change for the FTSE 100?Looking more widely at the position of the FTSE 100, if we were to assume
that the FTSE 100 were all to adopt the LCP Treasury Model to set their
discount rate:
• the combined accounting liability for pensions would reduce by around
• the aggregate level of surplus would move back to the levels seen in 2007
4. Setting accounting discount rates
LCP Treasury Model case studyIn the current low yield environment, pension scheme figures have become
increasingly material to company accounts. As a result, companies are
increasingly scrutinising their pension figures to make sure that the methods
and assumptions used are the most appropriate. In many cases, such a review
can show that the accounts may be overly conservative, and more robust
methods can lead to smaller liability values.
The discount rate is the key assumption in pensions accounting and small
changes in this assumption can have a huge impact on accounts. Accounting
standards require that discount rate assumptions are based on the yields of high
quality corporate bonds. Pension schemes are typically expecting to run for the
next 80 years or so, yet there are few true corporate bonds available beyond 30
years. How this issue is resolved can lead to distorted discount rates, and make
pension liabilities appear larger than they should.
We have recently launched the LCP Treasury Model, an improved way to set
accounting discount rates. Whereas a number of conventional models for this
purpose are influenced by changes in gilt yields, the LCP Treasury Model is a
robust model based solely on corporate bonds.
Currently, the LCP Treasury Model reveals that typical discount rates are too
prudent, by up to 0.3% pa. Whilst this may not sound much, we have already
helped over 30 of our clients adopt the LCP Treasury Model with impacts
relative to their original position including:
5% 10%reduction in value of
pension liabilities
reduction in
P&L costs
£25bn
Each of the major auditing firms has accepted discount rates produced using the LCP Treasury Model for several of our clients (of course, as with all approaches, the situation is considered on a case by case basis and depends on each company’s individual circumstances).
34 LCP Accounting for Pensions — 2017
Progression of aggregate accounting deficit since 2016
-100
-80
-60
-40
-20
0
20
4030 June 2016 31 December 2016 30 June 2017
Agg
rega
te F
TSE
10
0 d
efic
it (
£bn
)
FTSE 100 deficit FTSE 100 deficit (using the LCP Treasury Model)
Jonathan Griffith Senior Consultant
35LCP Accounting for Pensions — 2017
If the FTSE 100 were all to adopt the LCP Treasury Model to set their discount rate the combined accounting liability for pensions would reduce by around £25bn.
5. Appendices
36 LCP Accounting for Pensions — 2017
Nick Bunch Partner
37
Discount rates decreased markedly in 2016, with the average rate falling from 3.8% pa to 2.7% pa. This has resulted in a significant increase in liability values and, for many companies, a corresponding increase in the deficit they have disclosed.
LCP Accounting for Pensions — 2017
Thi
s ta
ble
sho
ws
the
key
dis
clo
sure
s m
ade
by
the
com
pan
ies
in t
he F
TS
E 1
00
as
at 3
1 D
ecem
ber
20
16 t
hat
rep
ort
ed IA
S19
fig
ures
in t
heir
20
16 a
cco
unts
. The
so
urce
of
the
dat
a is
eac
h
com
pan
y’s
annu
al r
epo
rt a
nd a
cco
unts
fo
r th
e ac
coun
ting
per
iod
end
ing
in 2
016
. The
mar
ket
valu
e o
f as
sets
and
sur
plu
s/(d
efici
t) fi
gur
es r
elat
e to
the
wo
rld
wid
e p
osi
tio
n o
f ea
ch c
om
pan
y,
not
just
the
UK
sch
emes
. Fig
ures
sho
wn
are
bef
ore
def
erre
d t
ax a
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efo
re a
ny b
alan
ce s
heet
ass
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mit
s ha
ve b
een
app
lied
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fig
ures
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und
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o t
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eare
st m
illio
n p
oun
ds.
The
dis
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t ra
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rice
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atio
n as
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pti
ons
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er t
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hose
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clo
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r th
e co
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ain
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mea
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ific
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ures
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e d
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ose
d.
2016
Sur
plu
s/(D
efici
t)
Co
mp
any
Year
-end
Mar
ket
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e o
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Tota
l£m
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mes
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flatio
n1
% p
a
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m
ort
alit
y?2
3iM
ar9
93
183
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lo A
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raZ
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aD
ec7,
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3.20
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va3
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98
03,
106
2.50
3.30
Y
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cock
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rnat
iona
l Gro
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ar3,
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(20
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2.9
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ents
Jun
414
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80
Y
BH
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illit
on
Jun
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(10
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Dec
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20Y
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tish
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eric
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roup
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ect
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roup
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2015
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lus/
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ket
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e o
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mes
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ort
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93
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(119
)(6
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Y
282
(86
)(1
3)N
DN
DN
2,52
2(9
)18
33.
80
3.10
Y
17(3
)2
3.55
ND
N
1,76
1(4
21)
(330
)N
DN
DN
970
(63)
(58
)3.
80
3.10
N
85
(10
)(1
0)
3.35
3.10
Y
7,8
83
(257
)(9
)3.
80
3.20
Y
85
1313
3.8
03.
20Y
Appendix 1 - FTSE 100 accounting disclosure listing
38 LCP Accounting for Pensions — 2017
2015
Sur
plu
s/(D
efici
t)
Mar
ket
valu
e o
f as
sets
£m
Tota
l£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te%
pa
RPI
In
flatio
n1
% p
a
Dis
clo
sed
m
ort
alit
y?2
94
5(4
86
)(4
86
)3.
503.
10Y
739
439
3.30
2.9
0Y
12(1
0)
(4)
ND
ND
N
2,56
0(1
,48
2)(9
77)
3.8
03.
10Y
14,5
35(1
,58
4)
(1,0
17)
3.8
03.
10Y
2,0
81
(235
)(2
35)
ND
ND
N
63
(38
)(2
6)
3.8
03.
10Y
27,9
61
2,0
91
2,0
91
3.70
3.20
Y
3,53
3(4
03)
793.
703.
00
Y
103
(4)
(4)
3.8
03.
20Y
82
(73)
(20
)4
.00
3.20
Y
20,6
90
49
154
83.
732.
93
Y
121
(27)
(27)
3.70
ND
Y
3,27
0(1
76)
(130
)3.
90
3.0
5Y
1,829
(136
)(1
36)
3.4
03.
10Y
2,8
1511
211
23.
00
2.8
0Y
227
77
3.10
3.20
Y
1,932
(38
5)(3
85)
3.8
03.
00
Y
37,6
3973
673
63.
87
2.9
9Y
49
4(1
5)(1
5)3.
95
3.10
Y
8,5
97
46
04
61
3.10
3.10
Y
750
(47)
(47)
ND
ND
N
28(5
)(5
)3.
90
3.20
Y
13(1
2)(1
2)N
DN
DN
100
(118
)(2
0)
ND
ND
N
4,13
7(3
9)
(39
)3.
103.
10Y
24,5
05
(1,6
75)
(1,3
75)
3.30
2.9
0Y
2016
Sur
plu
s/(D
efici
t)
Co
mp
any
Year
-end
Mar
ket
valu
e o
f as
sets
£m
Tota
l£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te%
pa
RPI
In
flatio
n1
% p
a
Dis
clo
sed
m
ort
alit
y?2
Dix
ons
Car
pho
neA
pr
923
(472
)(4
72)
3.50
2.9
5Y
Exp
eria
nM
ar71
0(1
6)
183.
40
2.9
0Y
Fre
snill
oD
ec13
(7)
(2)
ND
ND
N
GK
ND
ec2,
580
(1,9
47)
(1,2
85)
2.58
3.30
Y
Gla
xoS
mit
hKlin
eD
ec17
,570
(2,0
84
)(1
,40
4)
2.70
3.20
Y
Gle
nco
reD
ec2,
04
7(3
48
)(3
48
)N
DN
DN
Ham
mer
son
Dec
65
(55)
(41)
2.9
03.
30Y
HS
BC
Ho
ldin
gs
Dec
34,3
84
2,14
92,
149
2.50
3.50
Y
Imp
eria
l Bra
nds
Sep
4,0
51(1
,023
)(3
65)
2.30
3.0
0Y
Info
rma
Dec
146
(38
)(3
8)
2.6
03.
40
Y
Inte
rCo
ntin
enta
l Ho
tels
Gro
upD
ec12
0(6
0)
22.
703.
30Y
Inte
rnat
iona
l Air
lines
Gro
upD
ec24
,417
(639
)(6
11)
2.6
53.
20Y
Inte
rtek
Gro
upD
ec14
4(3
2)(3
2)2.
70N
DY
ITV
Dec
3,8
33(3
67)
(316
)2.
65
3.23
Y
John
son
Mat
they
Mar
1,875
49
49
3.70
3.0
0Y
Kin
gfi
sher
Jan
2,6
3515
915
93.
60
3.10
Y
Lan
d S
ecur
itie
s G
roup
Mar
215
2525
3.50
3.15
Y
Leg
al &
Gen
eral
Gro
up3
Dec
2,20
0(4
60
)(4
60
)2.
703.
25Y
Lloy
ds
Ban
king
Gro
upD
ec4
5,57
8(2
44
)(2
44
)2.
763.
23Y
Lond
on
Sto
ck E
xcha
nge
Gro
upD
ec6
06
(73)
(73)
2.70
3.30
Y
Mar
ks &
Sp
ence
r G
roup
Ap
r8
,515
832
833
3.4
02.
95
Y
Med
iclin
ic In
tern
atio
nal
Mar
830
(119
)(1
19)
ND
ND
N
Mer
lin E
nter
tain
men
tsD
ec32
(11)
(11)
2.70
3.4
0Y
Mic
ro F
ocu
s3A
pr
19(6
)(6
)N
DN
DN
Mo
ndi G
roup
Dec
118
(156
)(3
1)N
DN
DN
Mo
rris
on
(WM
) S
uper
mar
kets
Jan
3,9
5018
618
63.
703.
20Y
Nat
iona
l Gri
dM
ar24
,537
(1,0
24)
(720
)3.
302.
90
Y
Appendix 1 - FTSE 100 accounting disclosure listingcontinued
39LCP Accounting for Pensions — 2017
2015
Sur
plu
s/(D
efici
t)
Mar
ket
valu
e o
f as
sets
£m
Tota
l£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te%
pa
RPI
In
flatio
n1
% p
a
Dis
clo
sed
m
ort
alit
y?2
775
3850
3.18
2.9
8Y
616
125
125
ND
ND
N
2,9
3829
731
53.
703.
10Y
512
1818
3.70
3.0
0Y
66
66
26
23.
753.
00
Y
7,8
199
61
96
13.
80
3.0
0N
34,7
08
(44
4)
(44
4)
3.9
03.
00
Y
1,676
(72)
523.
80
3.30
Y
3,6
60
(38
4)
(18
9)
3.8
53.
05
Y
8,9
16(1
,058
)(5
24)
3.70
3.0
0N
12,5
5434
99
90
3.6
03.
25Y
54,8
41
(2,8
81)
168
ND
ND
N
6,6
193,
382
3,38
23.
503.
10Y
7,19
36
716
33.
92
3.0
2Y
18(1
9)
(19
)N
DN
DN
6,9
88
(70
8)
(69
2)3.
503.
00
Y
937
115
115
3.8
03.
30Y
2,0
87
(46
9)
(459
)3.
303.
00
Y
00
0N
/AN
/AN
0(2
6)
0N
DN
DN
912
(95)
(66
)3.
80
3.10
Y
4,0
17(8
9)
73.
503.
20Y
1,38
8(6
03)
(229
)N
DN
DY
3,75
1(4
58)
(458
)3.
303.
20Y
1,576
(26
0)
(138
)3.
70N
DY
3,9
96
1,378
1,38
63.
703.
15Y
1,88
9(1
77)
(177
)3.
70N
DY
2
016
Sur
plu
s/(D
efici
t)
Co
mp
any
Year
-end
Mar
ket
valu
e o
f as
sets
£m
Tota
l£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te%
pa
RPI
In
flatio
n1
% p
a
Dis
clo
sed
m
ort
alit
y?2
Nex
tJa
n72
54
658
3.53
3.0
5Y
Old
Mut
ual
Dec
772
154
154
ND
ND
N
Pea
rso
nD
ec3,
49
711
113
32.
503.
30Y
Per
sim
mo
nD
ec6
06
2323
2.8
03.
20Y
Pro
vid
ent
Fin
anci
alD
ec8
3072
722.
553.
25Y
Pru
den
tial
3D
ec9
,00
656
356
32.
60
3.20
N
RB
SD
ec4
9,2
295,
239
5,23
92.
703.
20Y
Rec
kitt
Ben
ckis
er G
roup
Dec
2,0
02
(154
)(1
3)2.
60
3.6
0Y
RE
LX G
roup
Dec
4,3
67
(636
)(3
93)
2.6
53.
25Y
Rio
Tin
toD
ec11
,270
(1,2
73)
(619
)2.
60
3.30
N
Ro
lls-R
oyce
Ho
ldin
gs
Dec
14,0
97
46
81,2
85
2.70
3.50
Y
Roy
al D
utch
She
llD
ec6
5,8
64
(6,9
24)
(3,3
07)
ND
ND
N
Roy
al M
ail
Mar
7,37
43,
559
3,55
93.
503.
00
Y
RS
A In
sura
nce
Gro
upD
ec8
,64
1(2
52)
(133
)2.
81
3.37
Y
Sag
e G
roup
(T
he)
Sep
21(2
5)(2
5)N
DN
DN
Sai
nsb
ury
(J)
Mar
7,23
5(4
08
)(3
90
)3.
65
3.15
Y
Sch
rod
ers
Dec
1,09
311
811
82.
703.
40
Y
Sev
ern
Tren
tM
ar2,
04
0(3
10)
(30
0)
3.6
03.
00
Y
Shi
re5
Dec
345
(437
)(4
37)
ND
ND
N
Sky
Jun
0(3
3)0
ND
ND
N
Sm
ith
& N
ephe
wD
ec1,1
49
(112
)(6
7)2.
60
3.30
Y
Sm
iths
Gro
upJu
l4
,312
102
218
2.30
2.70
Y
Sm
urfi
t K
app
a G
roup
Dec
1,66
6(7
53)
(312
)N
DN
DY
SS
EM
ar3,
703
(132
)(1
32)
3.6
03.
10Y
Sta
ndar
d C
hart
ered
Dec
1,674
(350
)(2
04
)2.
70N
DY
Sta
ndar
d L
ife
Dec
4,9
99
1,66
51,6
752.
703.
25Y
Tayl
or
Wim
pey
Dec
2,13
6(2
33)
(233
)2.
70N
DY
Appendix 1 - FTSE 100 accounting disclosure listingcontinued
40 LCP Accounting for Pensions — 2017
2015
Sur
plu
s/(D
efici
t)
Mar
ket
valu
e o
f as
sets
£m
Tota
l£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te%
pa
RPI
In
flatio
n1
% p
a
Dis
clo
sed
m
ort
alit
y?2
9,6
77(4
,84
2)(4
,70
8)
3.70
3.10
Y
1,70
4(8
37)
(30
3)3.
80
ND
N
15,2
73(1
,28
5)(4
60
)3.
703.
00
Y
3,13
479
793.
103.
00
Y
4,9
56(3
98
)(3
32)
3.0
03.
00
Y
1,89
4(5
54)
(554
)3.
302.
90
Y
1,477
(15)
273.
60
3.20
Y
814
(226
)(6
2)3.
70N
DY
2
016
Sur
plu
s/(D
efici
t)
Co
mp
any
Year
-end
Mar
ket
valu
e o
f as
sets
£m
Tota
l£m
Fund
ed
sche
mes
£m
Dis
coun
t ra
te%
pa
RPI
In
flatio
n1
% p
a
Dis
clo
sed
m
ort
alit
y?2
Tesc
oF
eb10
,30
2(3
,175)
(3,0
58)
3.8
02.
90
Y
TU
I Gro
upS
ep2,
301
(1,2
17)
(439
)2.
30N
DN
Uni
leve
rD
ec18
,136
(2,2
19)
(1,2
46
)2.
703.
20Y
Uni
ted
Uti
litie
s G
roup
Mar
3,24
627
527
53.
40
3.20
Y
Vo
daf
one
Gro
upM
ar4
,925
(270
)(2
04
)3.
202.
80
Y
Whi
tbre
adM
ar1,9
32(2
88
)(2
88
)3.
702.
90
Y
Wo
lsel
eyJu
l1,5
58(1
47)
(10
3)2.
40
2.8
0Y
WP
PD
ec9
34(2
76)
(91)
2.50
ND
Y
Appendix 1 - FTSE 100 accounting disclosure listingcontinued
No
tes:
1 W
e ha
ve li
sted
RP
I as
the
mea
sure
of
infl
atio
n an
d e
xclu
ded
CP
I whe
re it
co
uld
be
iden
tifi
ed in
the
acc
oun
ts.
2 T
his
colu
mn
ind
icat
es c
om
pan
ies
that
dis
clo
sed
suffi
cien
t in
form
atio
n to
cal
cula
te t
heir
ass
ump
tio
n fo
r lif
e ex
pec
tanc
y fo
r a
mal
e p
ensi
one
r in
the
UK
.
3 A
viva
, Leg
al &
Gen
eral
and
Pru
den
tial
ho
ld g
roup
insu
ranc
e p
olic
ies
in r
esp
ect
of
som
e o
f th
eir
ob
ligat
ions
. We
have
incl
uded
the
dis
clo
sed
val
ue o
f th
ese
po
licie
s in
the
fig
ures
sta
ted
abov
e, a
s fo
llow
s: A
viva
£6
33m
(20
15: £
546
m),
Leg
al &
Gen
eral
: £77
9m
(20
15: £
746
m)
and
Pru
den
tial
: £13
4m
(20
15: £
202m
). A
dd
itio
nally
Mic
ro F
ocu
s ho
lds
a lo
ng t
erm
pen
sio
n as
set
of
£15
m (
2015
: £9
m)
whi
ch is
no
t re
cog
nise
d u
nder
IAS
19 b
ut is
incl
uded
in t
he fi
gur
es a
bov
e.
4 T
he fi
gur
es f
or
BA
E S
yste
ms
excl
ude
£51
6m
of
its
2016
defi
cit
(£1,0
53m
in 2
015
) w
hich
is a
lloca
ted
to
eq
uity
acc
oun
ted
inve
stm
ents
and
oth
er p
arti
cip
atin
g e
mp
loye
rs
5 S
hire
acq
uire
d it
s d
efine
d b
enefi
t p
ensi
on
sche
me
dur
ing
its
2016
acc
oun
ting
yea
r. N
o fi
gur
es a
re t
here
fore
sho
wn
for
2015
.
The
20
16 fi
gur
es a
re a
s at
the
end
of
the
acco
unti
ng p
erio
ds
end
ing
in 2
016
. The
20
15 fi
gur
es a
re a
s at
the
sta
rt o
f th
e ac
coun
ting
per
iod
. All
fig
ures
sho
wn
abov
e w
ere
take
n fr
om
IAS
19
dis
clo
sure
s. F
igur
es h
ave
bee
n co
nver
ted
to
po
und
s st
erlin
g w
here
a c
om
pan
y ha
s re
po
rted
fig
ures
in it
s ac
coun
ts in
a d
iffer
ent
curr
ency
.
Trad
itio
nally
, so
me
com
pan
ies
wit
h ov
erse
as p
ensi
on
pla
ns d
o n
ot
fund
the
m v
ia a
n ex
tern
al s
chem
e, in
stea
d b
acki
ng t
he p
ensi
on
pla
n w
ith
com
pan
y as
sets
, whi
ch m
ay r
esul
t in
a la
rger
defi
cit
bei
ng d
iscl
ose
d. W
here
dis
clo
sed
, the
sur
plu
s/(d
efici
t) a
ttri
but
able
to
fun
ded
sch
emes
is a
lso
sho
wn
abov
e.
The
dis
coun
t ra
tes
and
infl
atio
n as
sum
pti
ons
ref
er t
o 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, B
urb
erry
Gro
up, E
asyj
et,
Har
gre
aves
Lan
sdo
wn,
Hik
ma
Pha
rmac
euti
cals
, Int
u P
rop
erti
es, P
add
y P
ow
er B
etfa
ir, R
and
go
ld R
eso
urce
s, S
t Ja
mes
's P
lace
and
Wo
rld
pay
.
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
16 a
nd h
ence
are
no
t in
clud
ed in
our
sur
vey:
G4
S, R
ento
kil I
niti
al, S
cott
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41LCP Accounting for Pensions — 2017
These tables show the key results of analysis of the disclosures made by the companies in the FTSE 100
as at 31 December 2016 that were reported in their 2016 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 2016. 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 numbers.
Largest IAS19 liabilities
Company2016
Liabilities £m2015
Liabilities £m
Royal Dutch Shell 72,788 57,723
BT Group 50,350 51,210
Lloyds Banking Group 45,822 36,903
RBS 43,990 35,152
BP 39,689 32,827
Barclays 33,033 28,279
BAE Systems1 32,307 29,236
HSBC Holdings 32,235 25,870
National Grid 25,561 26,180
International Airlines Group 25,056 20,199
Largest IAS19 deficits
Company2016
Deficit £m2015
Deficit £m
Royal Dutch Shell 6,924 2,881
BP 6,719 4,215
BT Group 6,382 7,583
BAE Systems2 6,083 4,522
Tesco 3,175 4,842
Unilever 2,219 1,285
GlaxoSmithKline 2,084 1,584
GKN 1,947 1,482
AstraZeneca 1,529 1,118
TUI Group 1,217 837
Appendix 2 - FTSE 100 accounting risk measures
42 LCP Accounting for Pensions — 2017
Largest IAS19 liabilities compared to market capitalisation
Company Liabilities £m Market cap £m
2016Liabilities/
Market cap %
2015Liabilities/
Market cap %
International Airlines Group 25,056 9,349 268 163
BAE Systems1 32,307 18,708 173 185
RBS3 43,990 26,275 167 101
RSA Insurance Group 8,893 5,951 149 164
Sainsbury (J) 7,643 5,273 145 156
Marks & Spencer Group 7,683 6,585 117 92
BT Group 50,350 43,882 115 140
Rolls-Royce Holdings 13,629 12,282 111 111
Lloyds Banking Group 45,822 44,456 103 71
Morrison (WM) Supermarkets 3,764 4,061 93 92
Largest IAS19 deficit compared to market capitalisation
Company Deficit £m Market cap £m
2016Deficit/
Market cap %
2015Deficit/
Market cap %
GKN 1,947 5,684 34 28
BAE Systems2 6,083 18,708 33 29
Tesco 3,175 14,564 22 24
TUI Group 1,217 6,463 19 12
BT Group 6,382 43,882 15 21
Capita 345 3,515 10 2
Dixons Carphone 472 4,864 10 10
Centrica 1,137 12,701 9 1
Sainsbury (J) 408 5,273 8 14
BP 6,719 95,722 7 7
Highest IAS19 funding level
Company Assets £m Liabilities £m
2016Assets/
Liabilities %
2015Assets/
Liabilities %Royal Mail 7,374 3,815 193 204
Standard Life 4,999 3,334 150 153
Old Mutual 772 618 125 125
3i 993 810 123 122
Aviva 20,327 17,347 117 117
Direct Line Insurance Group 103 91 113 118
Land Securities Group 215 190 113 103
Schroders 1,093 975 112 114
RBS 49,229 43,990 112 99
Marks & Spencer Group 8,515 7,683 111 106
Appendix 2 - FTSE 100 accounting risk measurescontinued
43LCP Accounting for Pensions — 2017
Highest employer contributions compared to dividends paid in accounting year5
CompanyContributions
£mDividends
£m
2016Contributions /Dividends %
2015Contributions /Dividends %
RBS 4,786 504 950 255
Anglo American 78 11 700 9
Royal Mail 488 220 222 203
International Airlines Group 734 358 205 420
Smiths Group 269 163 165 49
BT Group 1,106 1,075 103 114
Rolls-Royce Holdings 271 300 90 61
Coca-Cola HBC 13 15 90 13
Sainsbury (J) 207 234 88 26
TUI Group 234 266 88 49
Largest service cost4
Company2016
Service cost £m2015
Service cost £m
Royal Dutch Shell 995 1,214
Royal Mail 694 502
BP 515 696
GlaxoSmithKline 300 271
BAE Systems 288 363
Lloyds Banking Group 277 314
RBS 272 368
BT Group 261 249
HSBC Holdings 255 248
Barclays 243 131
Largest employer contributions
Company2016
Contributions £m2015
Contributions £m
RBS 4,786 1,060
BT Group 1,106 1,054
Royal Dutch Shell 874 848
International Airlines Group 734 499
Barclays 720 689
Tesco 656 576
Lloyds Banking Group 623 427
HSBC Holdings 538 428
Royal Mail 488 409
GlaxoSmithKline 481 408
Appendix 2 - FTSE 100 accounting risk measurescontinued
44 LCP Accounting for Pensions — 2017
Largest employer contributions compared to service cost4
CompanyContributions
£mService cost
£m
2016Contributions less service
cost £m
2015Contributions less service
cost £m
RBS 4,786 272 4,514 692
BT Group 1,106 261 845 805
Tesco 656 35 621 -55
International Airlines Group 734 117 617 449
Barclays 720 243 477 820
Lloyds Banking Group 623 277 346 113
National Grid 470 171 299 228
HSBC Holdings 538 255 283 181
Smiths Group 269 1 268 78
Unilever 417 184 233 176
Highest equity allocation
Company2016
Equity allocation %2015
Equity allocation %
Merlin Entertainments 69 68
Ashtead Group 67 70
Tesco 57 62
BP 53 56
Informa 52 42
Next 52 51
GlaxoSmithKline 50 50
Wolseley 48 53
Whitbread 46 51
Experian 45 45
1 The liability figures for BAE Systems include liabilities allocated to equity accounted investments and other participating employers.
2 The deficit figures for BAE Systems exclude £516m of its 2016 deficit (£1,053m in 2015) which is allocated to equity accounted
investments and other participating employers.
3 The market capitalisation for RBS does not include non voting B shares held by the government.
4 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.
5 Tesco did not pay a dividend in its 2016 accounting year (2015: £914m) but contributed £656m (2015: £576m) to its pension scheme.
ConvaTec also did not pay a dividend during its 2015 or 2016 accounting years, but contributed £0.4m in 2016 (2015: £0.6m) to its
pension scheme.
Appendix 2 - FTSE 100 accounting risk measurescontinued
45LCP Accounting for Pensions — 2017
We would like to thank those from LCP who have made this report possible:
Alex Waite
Bob Scott
Cat Drummond
Catriona Armstrong
Clive Harrison
David Everett
Dan Osborne
Dane Carter
Dorothy Mendoza
Emma Jenkins
Fern Lai
Fionn Sweeney
Geraint Jones
Gill Hoyle
Jenny Pike
Jeremy Dell
Jessica Horner
Jim Little
Joanne Stewart
Jonathan Griffith
Jordana Shulman
Josh Lenz
Kate Sinclair
Katherine Rumsey
Katie Robson
Kelly Ronaldson
Matt Charman
Nayan Dave
Nick Bunch
Peter Fitchett
Phil Cuddeford
Rebeccah Robinson
Reema Patel
Sailesh Mistry
Sam Tomes
Sarah Lossin
Shaun Wood
Stuart Levy
Tim Marklew
46 LCP Accounting for Pensions — 2017
LCP Accounting for Pensions 2016
Bob Scott - Partner
+44 (0)20 7432 6605
Nick Bunch - Partner
+44 (0)20 7432 3090
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LCP Accounting for Pensions 2017