LCP ACCOUNTING FOR PENSIONS 2012 FTSE 100 companies … · p6 1.1 Employers face challenges from a number of fronts p6 1.2 Deficits increase with the position remaining volatile p7

LCP ACCOUNTING FOR PENSIONS 2012

FTSE 100 companies paid over £20 billion into their pension schemes during 2011 yet pension deficits fluctuated daily by up to £10 billion. This report looks at how the UK’s largest companies manage such sizeable pension challenges.

2

For further information about UK issues please contact Bob Scott

or Nick Bunch in our London office. For international issues contact

Shaun Southern, Richard Chini or alternatively the partner who

normally advises you.

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

provided prominent acknowledgement of the source is given. The report

is not intended to be an exhaustive analysis of IAS19. Although every

effort is made to ensure that the information in this report is accurate,

Lane Clark & Peacock LLP accepts no responsibility whatsoever for any

errors, or the actions of third parties. Information and conclusions are

based on what an informed reader may draw from each company’s

annual report and accounts. None of the companies have been

contacted to provide additional explanation or further details.

View a full list of our services at www.lcp.uk.com

© Lane Clark & Peacock LLP July 2012

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

Nick Bunch

Rachael Casey

Catherine Chalk

Richard Chini

Laura Davies

Jeremy Dell

Harry Dhaliwal

Catherine Drummond

Beth Dunmall

David Everett

Anika Grant-Braham

Emma Ingham

Holly Moffat

Stuart Levy

Sam Lunn

Tim Marklew

Noreen McGovern

Emily Pegg

Simon Perera

Daniel Potter

David Poynton

Sarah Pryor

Martin Robinson

Rebeccah Robinson

Katie Robson

Bob Scott

Holly Scott

Kate Sinclair

Shaun Southern

Laura Strachan

James Trask

Alex Waite

Rachel Walton

David Wong Min

Charlotte Woods

2

LCP Accounting for Pensions 2012

p4 1. Main findingsp6 1.1 Employers face challenges from

a number of fronts

p6 1.2 Deficits increase with the position

remaining volatile

p7 1.3 Significant contributions already being

paid to remove deficits

p7 1.4 The end of final salary pensions

p8 1.5 Companies still benefiting from the

change to CPI inflation

p9 1.6 Risk reduction measures continue

p10 1.7 Increases in life expectancy assumptions

tailing off

p10 1.8 Overseas schemes of FTSE 100 companies

p12 2. Summary of UK findingsp14 2.1 Introduction

p14 2.2 Increased pressure on companies

p16 2.3 Deficits increase with the position

remaining volatile

p18 2.4 Pension scheme funding

p22 2.5 The end of final salary pensions

p23 2.6 The continuing change to CPI inflation

p25 2.7 Reducing risk in pension schemes

p28 2.8 Life expectancy increasing more slowly?

p30 3. Developments in UK pension provisionp32 3.1 “Defined ambition”, auto-enrolment,

...what next?

p33 3.2 “Red tape challenge”

p33 3.3 The new European Pensions Directive

p35 3.4 Auto-enrolment

p36 4. Accounting standards for pensionsp38 4.1 Reduced profits for most companies

p39 4.2 Removal of “corridor” will hit some

balance sheets

p40 4.3 New disclosure rules

p40 4.4 Other changes

p42 5. LCP’s analysis of FTSE 100 IAS19 disclosures

p44 5.1 Introduction

p44 5.2 Analysis of results

p49 5.3 Key assumptions

p60 6. Non-UK schemes of FTSE 100 companiesp62 6.1 Significance of non-UK arrangements

p64 6.2 Deficit and risk reduction measures

p66 6.3 Consistency of assumptions

p68 6.4 European Pensions Directive

p69 Appendix 1 - FTSE 100 accounting

disclosure listing

p73 Appendix 2 - FTSE 100 accounting

risk measures

3

4

Contentp4 1. Main findingsp6 1.1 Employers face challenges

from a number of fronts

p6 1.2 Deficits increase with the

position remaining volatile

p7 1.3 Significant contributions

already being paid to

remove deficits

p7 1.4 The end of final

salary pensions

p8 1.5 Companies still

benefiting from the

change to CPI inflation

p9 1.6 Risk reduction

measures continue

p10 1.7 Increases in life expectancy

assumptions tailing off

p10 1.8 Overseas schemes of

FTSE 100 companies

Companies face renewed pension challenges as trustees seek to recover ever larger funding deficits and as auto-enrolment draws nearer. Over the next couple of years contributions to FTSE 100 pension schemes could increase by over £5 billion.

Bob Scott

Partner LCP

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Deficit contributions (defined benefit)

Employer service cost (defined benefit)

Employer defined contribution costs

Employer contributions to pension schemes (£ billion)

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1. Main findings6

1.1 Employers face challenges from a number of fronts � FTSE 100 companies again paid substantial contributions - £21.4 billion -

to their pension schemes in 2011.

� Yet they remain under pressure from trustees, from government and,

potentially, from Europe to contribute ever-increasing amounts to fund

their employees’ and former employees’ pensions.

� Uncertainty in financial markets has seen equity values fall while the

yields on UK government bonds have reached record lows. This has

resulted in trustees calculating higher funding deficits and requiring

increased contributions.

� At the same time the proportion of FTSE 100 pension scheme assets

held in equities has fallen to 35%, just over half of the level in 2001.

Despite this, deficits have still been extremely volatile, with movements

of up to £10 billion in a single day, at points during the last year.

� FTSE 100 companies will also be required to begin “auto-enrolling”

all of their qualifying employees in a pension scheme later this year,

adding to their overall pension costs.

� With no further changes, pension contributions could exceed £26 billion

in 2013 once this requirement takes effect.

� Should the government press ahead with its unwelcome campaign to

force pension schemes to “equalise” Guaranteed Minimum Pensions,

employers will be faced with further costs which, for the FTSE 100,

could amount to several billion pounds.

� In the background, consultation on a new European pensions directive

is ongoing. This could make UK defined benefit schemes subject

to “Solvency II” type reserving, as will shortly apply for insurance

companies. This alone could increase the funding requirements for

FTSE 100 pension schemes by £200 billion.

� It is clear that the present pensions system will not bear such increased

demands on companies’ finances. Therefore, the likelihood is that we

shall see further cutbacks in the level of benefits for future service,

combined with a greater appetite amongst companies for effective

“liability management” exercises.

1.2 Deficits increase with the position remaining volatile � LCP estimates that the combined UK IAS19 net deficit of FTSE 100

companies’ pension schemes was £41 billion at 31 May 2012,

compared to £19 billion at 30 June 2011.

� We estimate that this reflects a total value of liabilities of £447 billion

and total assets of £406 billion.

� Since June 2011, corporate bond yields have fallen by nearly 1% pa on

average and, although expectations of future inflation have also fallen,

these lower yields mean that IAS19 liability values have risen significantly

over the last 11 months.

35%The proportion of assets

held in equities at the

end of 2011.

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7LCP Accounting for Pensions 2012

1. Main findings

� Over the same period, equity markets have fallen and, although bond

holdings have increased in value, the vast majority of schemes do not

hold enough bonds to hedge all of the increase in liability values.

� The position varies significantly for individual companies.

Those invested heavily in equities have seen deficits increase by

more than those invested mostly in corporate or government bonds.

For example, Prudential - which sponsors a scheme with less than

20% of its assets in equities - saw a 21% improvement in funding level

over 2011. However, BP - which holds over two-thirds of pension scheme

assets in equities - saw a 9% fall.

� The increase in the total deficit, £22 billion over the last 11 months,

masks the significant variability of the position on a day to day

basis. For example, on 1 November 2011, a day on which the FTSE 100

index fell by 2.2% and corporate bond yields also fell, we estimate

that the combined FTSE 100 deficit increased by around £10.7 billion.

This illustrates the size of the challenge faced by many companies

in managing their pension liabilities.

� The position remains volatile given the uncertainty surrounding

the Eurozone and the knock on impact that this is having on

financial markets.

� Further detail and analysis can be found in section 2.3.

1.3 Significant contributions already being paid to remove deficits � FTSE 100 companies paid a total of £16.9 billion into their defined

benefit pension schemes during 2011 - almost identical to the amount

that was paid in 2010. Of this, we estimate that over £11 billion went

towards paying off deficits rather than covering additional benefits.

� There is no sign that contributions will fall any time soon. In fact,

since the end of 2011 BT has made a £2 billion payment into one of its

pension schemes in order to accelerate the removal of its deficit. This is

the largest one-off deficit contribution ever made by a company to a UK

pension scheme.

� With many funding valuations being carried out with effective dates at

the end of 2011 and early 2012 - when funding positions were particularly

stretched - the level of deficit contributions may well increase in the next

couple of years.


1.4 The end of final salary pensions � The trend for companies to reduce levels of defined benefit pension

provision has continued again this year. Royal Dutch Shell has

announced plans to close its final salary scheme to new employees in

the next year and BAE Systems will be closing its hybrid scheme to new

entrants during 2012.

£2bnThe largest ever deficit

contribution to a UK

pension scheme,

paid by BT in early 2012.


1. Main findings8

� After allowing for these closures, none of the FTSE 100 companies

covered in this survey will continue to offer a final salary pension to

new employees.

� Eight other companies that had already closed their scheme to new

employees, including Kingfisher and Tate & Lyle, went further and

ceased future accrual for existing members during 2011 or have recently

announced plans to do so.

� Although many companies are offering only defined contribution

schemes for new employees, some companies have retained an element

of defined benefit provision, whilst designing their schemes to mitigate

some of the risks that full-blown final salary schemes bring.

� For example, Tesco has a scheme under which retirement age will

increase to 67, with further increases possible should life expectancy

continue to rise, and Morrisons has set up a new “cash balance” scheme

which provides members with a salary-linked capital sum at retirement.

� Pensions Minister Steve Webb hopes that more companies will follow

the example set by Tesco and Morrisons and establish what he calls

“defined ambition” schemes - thereby enabling some level of defined

benefit provision to continue at an affordable cost.

� Whether companies are prepared to embrace such arrangements will

depend on the legislative framework - under current pensions legislation,

companies that sponsor defined benefit pension schemes of any type

still face significant compliance and regulatory costs.


1.5 Companies still benefiting from the change to CPI inflation � On a positive note for employers, companies have continued to disclose

comparatively lower pension obligations due to the change in inflation

measure used to index pensions from the Retail Prices Index (RPI) to the

Consumer Prices Index (CPI).

� By the end of 2011 almost half of the FTSE 100 companies with defined

benefit pension schemes had allowed for a saving from this change.

The £3.5 billion gain disclosed by BT remains by far the largest saving.

� Since the change in inflation measure was announced in mid-2010,

the Office for Budget Responsibility (OBR) has published a report which

suggests that the long-term difference between RPI and CPI

will be larger than previously expected. Many companies that had

already recorded a gain from the change to CPI inflation in their 2010

accounts have reflected a further saving in 2011. For example,

BAE Systems disclosed a £348 million gain from the change to CPI in

its 2010 accounts and has now reflected a further reduction in IAS19

liabilities of around £175 million following an increase in the assumed

gap between RPI and CPI inflation in its 2011 accounts.

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1. Main findings

� A wider gap between RPI and CPI would mean even lower pensions for

many pension scheme members than previously expected.

� In light of the potential savings available - and the corresponding

negative impact on members’ benefits - it is perhaps not surprising that

we have seen both companies and member representatives going to

court over this issue.

� In a recent High Court ruling, it was determined that CPI inflation

could be used as the basis for increases to benefits in the QinetiQ

pension scheme as the scheme rules allowed the use of a replacement

inflation index. We expect other companies to investigate the impact

that this ruling has on their pension schemes in the coming months.

� Similarly, we have seen trade unions and pensioner groups, notably from

the British Airways Pension Scheme, seeking to overturn the switch from

RPI to CPI.

� More recently, we have seen suggestions that the Office for National

Statistics (ONS) could be about to review the formulae for calculating

the indices, thereby reducing RPI and bringing it more into line with CPI.

Such a change, if it came through, would benefit those companies with

pension benefits that remain tied to RPI (and further reduce members’

benefits). However, it would also affect the receipts from, and therefore

valuations of, index-linked government bonds, which makes it difficult

to gauge the overall impact on FTSE 100 companies.


1.6 Risk reduction measures continue � The move towards lower risk investment strategies continues, with a

marked fall in the proportion of equities held by pension schemes over

2011. For companies with December year-ends, the average proportion

of assets invested in equities fell from 43% at 31 December 2010 to 35%

at 31 December 2011. Aviva made one of the largest changes, reducing

the proportion of equities held by its UK pension schemes from 26%

down to just 7%.

� Companies have also taken steps to remove some of the other risks

posed by their pension schemes. During 2011 International Airlines Group, ITV and Rolls-Royce all entered into “longevity swap” contracts

which are designed to protect them from increases in pension cost as a

result of members living longer than expected.

� Similarly, Smiths purchased a bulk annuity policy which protects it

from investment, inflation and longevity risk for a specific section of its

pension scheme.

� Having recently seen significant increases in the value of government

and corporate bonds, schemes that invest heavily in these asset

classes may find that pricing for bulk annuity policies is

particularly attractive.


1. Main findings10

� Other risk reduction measures carried out involve the removal of

defined benefit liabilities either through encouraging members to

transfer benefits out of the pension scheme or as a result of pension

increase exchanges.


1.7 Increases in life expectancy assumptions tailing off � In recent years we have seen a trend for companies to assume that their

pension scheme members will live longer and longer.

� Average life expectancy assumptions increased again this year, but the

trend may be slowing with five companies - up from three in 2010 -

weakening some aspect of their mortality assumption.

� For example, Next disclosed that its IAS19 liabilities were lower by

£14 million as a result of reducing its longevity assumptions.

� Further detail and analysis can be found in section 2.8 and section 5.

1.8 Overseas schemes of FTSE 100 companies � Overseas pension and other post-retirement liabilities remain significant

for many FTSE 100 companies. We estimate that, under IAS19, FTSE 100

companies have in excess of £100 billion of overseas pension and other

post-retirement liabilities including healthcare.

� As in the UK, a number of FTSE 100 companies have disclosed that steps

have been taken during 2011 to control pension risks and reduce pension

deficits in their overseas schemes.

� Many companies provide healthcare benefits to retired former overseas

employees. FTSE 100 companies valued such liabilities at £14 billion,

of which £9 billion was for US schemes.

� Falling discount rates and changes to mortality tables have acted to

push up IAS19 pension liabilities in many countries.

� Many companies adopt different longevity assumptions for calculating

their IAS19 liabilities overseas from those that they use in the UK.

It is not always clear that such different treatment is justifiable.

� Further detail and analysis can be found in section 6.

Many FTSE 100 companies have already benefited from the change to CPI inflation for compulsory indexation of benefits. Yet a recent court case may have opened the way for even more schemes to adopt CPI as their indexation measure. It is members who pay the price though, with lower eventual benefits.

Bob Scott

Partner LCP

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12

Contentp12 2. Summary of UK findingsp14 2.1 Introduction

p14 2.2 Increased pressure

on companies

p16 2.3 Deficits increase with the

position remaining volatile

p18 2.4 Pension scheme funding

p22 2.5 The end of final

salary pensions

p23 2.6 The continuing change

to CPI inflation

p25 2.7 Reducing risk in

pension schemes

p28 2.8 Life expectancy increasing

more slowly?

Pension scheme liabilities - and deficits - can be substantial. During 2011 ten FTSE 100 companies paid more into their pension schemes than they distributed in dividends to shareholders.

Bob Scott

Partner LCP

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2. Summary of UK findings14

2.1 Introduction

This section provides an insight into the disclosure of pension scheme costs in companies’ accounts, comparing the different practices adopted by the largest UK companies and highlighting the financial implications.

By analysing their pension disclosures we aim to measure the exposure

that companies have to their pension liabilities and deficits, particularly in

the context of their market capitalisations, and we identify the steps that

companies are taking to address their pensions issues.

FTSE 100 companies scrutinisedThis report covers 83 of the FTSE 100 companies, analysing annual reports

based on FTSE 100 constituents as at 31 December 2011. 17 companies

were excluded from this report as they did not sponsor a material funded

defined benefit pension scheme. A full list and summary details of the

83 companies’ key pension disclosures are set out in appendix 1.

All the companies analysed have reported under international accounting

standards (IAS19 for pension costs) as required under EU regulations.

The information and conclusions of this report are based solely on

detailed analysis of the information that companies have disclosed in

their annual report and accounts and other publicly available information.

We do not approach companies or their advisers for additional information

or explanation.

2.2 Increased pressure on companiesAs this report goes to print, UK companies are facing an increasing

burden, brought upon them as a result of the pension arrangements

provided to their employees and former employees.

With the Eurozone crisis causing havoc in financial markets, and economic

uncertainty in many other regions, the valuation of pension liabilities

and the value of assets held to meet these pension promises has been

fluctuating wildly. A “flight to quality” has seen investors move money

out of Eurozone countries and higher risk assets such as equities and into

the relative safety of UK government bonds, putting downward pressure

on yields. Within the UK, the Bank of England’s decision to expand its

previous programme of quantitative easing has also served to reduce

government bond yields. Lower yields mean that pension scheme

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2. Summary of UK findings

trustees require a greater level of assets to meet the same liabilities,

resulting in higher deficits, all other things being equal. With the

International Monetary Fund (IMF) recently calling on the Bank of England

to consider a further extension of the quantitative easing programme,

the position may get worse before it gets better.

In April 2012 the Pensions Regulator released its much anticipated

statement on funding pension schemes in the current economic climate.

However, rather than providing any respite this simply confirmed that

it was business as usual for pension scheme funding. Pension scheme

trustees may well have to ask companies for a further increase in

contributions at their next funding valuation.

On top of this, a new European pensions directive threatens to impose

in many cases significantly higher levels of funding and additional

capital requirements, with companies being required to pay even more

contributions to their pension schemes.

Some companies are already finding that the fact that they sponsor

a defined benefit pension scheme is enough to constrain their normal

business activities. A Court of Appeal ruling in October 2011 regarding

the Nortel and Lehman Brothers pension schemes has not helped the

situation. This confirmed that where a financial support direction is issued

by the Pensions Regulator following an insolvency event, the costs of

complying are treated as an administration expense and therefore rank

ahead of payments to creditors. Although issuing a financial support

direction is a lengthy and difficult process, the ruling does effectively give

the Regulator the power to promote the pension scheme deficit above any

other debt owed by the employer. In some cases, companies have found

that this has affected their ability to borrow or refinance existing debt.

Even companies that don’t provide any defined benefit pensions will

shortly have to face the additional cost and administrative burden of the

government’s requirement to automatically enrol all qualifying employees

into a pension scheme that meets minimum quality standards.



2.3 Deficits increase with the position remaining volatileWe estimate that the combined FTSE 100 pension deficit in respect of UK

liabilities was £41 billion at the end of May 2012, reflecting a total liability

value of £447 billion and total assets of £406 billion.

The chart below shows how the position has developed over the past

five years. Our figures include unfunded pension promises but exclude,

where possible, the overseas pension schemes sponsored by FTSE 100

companies and any employee benefits other than pensions. A separate

analysis of overseas arrangements is included in section 6.

The increase on the deficit figure of £19 billion at 30 June 2011, as reported

last year, is due primarily to a continued fall in corporate bond yields,

which has resulted in an increase in reported IAS19 liability values.

To some extent the increase in the deficit has been moderated by the

significant contributions that companies continue to pay into their

pension schemes and by a rise in asset values.

However, the position has varied significantly for individual companies,

with pension schemes invested heavily in equities seeing more of a

deterioration in funding level than those invested mostly in corporate

or government bonds.

Prudential and Rolls-Royce - which sponsor schemes with less than 20%

of their assets in equities - saw funding levels increase by 21% and 13%

respectively during 2011. In contrast, the pension schemes of BP and

Estimated IAS19 position for UK schemes of FTSE 100 companies

-100

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-60

-40

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20

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07

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7

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9

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£41bnThe aggregate FTSE 100

pension deficit as at

31 May 2012 stood at

£41 billion, compared

with £19 billion at the

end of June 2011.

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Capita hold over two-thirds of their assets in equities or similar assets and

both saw a reduction of 9% in their funding level.

At certain times during the last year the position was extremely

volatile with total deficits for FTSE 100 companies moving by as

much as £10 billion in a single day. Some examples are set out below.

With uncertainty surrounding the future of the Eurozone, financial markets

remain unsettled. Pension scheme deficits therefore remain volatile.

The table below shows how the position could develop from the end

of May 2012 (when corporate bond yields were about 4.5% pa and the

FTSE 100 was around 5,320).

Bond yieldsUnder IAS19, liabilities are measured by reference to yields on high quality

corporate bonds. There was a steady decrease in yields over 2011 and into

2012 which has resulted in an increase in IAS19 liability values.

At 31 May 2012 the yield on the iBoxx over 15 year AA-rated corporate

bond index was 4.22% pa - the lowest level since corporate bond yields

were first used for measuring accounting liabilities.

The graph overleaf shows how corporate bond yields have varied over

recent years.

DateEstimated change in total deficits

Main reasons for change

10 October 2011 £9.0 billion reduction1.8% rise in equity markets;

0.11% pa rise in AA bond yields

31 October 2011 £8.9 billion increase2.8% fall in equity markets;

0.16% pa fall in AA bond yields

1 November 2011 £10.7 billion increase2.2% fall in equity markets;

0.21% pa fall in AA bond yields

Corporate bond yields

Level of FTSE 100 4.0% pa 4.5% pa 5.0% pa

4,820 £94 billion deficit £54 billion deficit £18 billion deficit

5,320 £81 billion deficit £41 billion deficit £6 billion deficit

5,820 £68 billion deficit £29 billion deficit £7 billion surplus



The difference between the peak of 7.72% pa in October 2008, just after

the collapse of Lehman Brothers, and present levels, is highly significant in

terms of IAS19 liability values. All else being equal, the fall in bond yields

since late 2008 represents an increase in IAS19 liability value of around 75%.

2.4 Pension scheme fundingCompanies have continued to pay significant contributions to their

pension schemes. Including contributions to both defined benefit and

defined contribution schemes, the total amount paid by companies during

2011 was £21.4 billion, slightly up on the £21.1 billion paid in 2010.

Contributions to defined benefit schemes totalled £16.9 billion, of which

we estimate £11.1 billion - almost two thirds - went towards removing

deficits rather than additional benefit accrual for current employees.

The highest level of contributions during the year was £2.2 billion

paid by Barclays. This included deficit contributions of £1.8 billion in

December 2011, which form part of the recovery plan put in place following

the September 2010 valuation of the bank’s main pension scheme.

Three other companies paid more than £1 billion into their defined benefit

pension schemes during 2011. These were Royal Dutch Shell (£1.4 billion),

BT (£1.3 billion) and Royal Bank of Scotland (£1.1 billion).

Ten companies - BAE Systems, Barclays, BT, International Airlines Group,

ITV, Lloyds Banking Group, Marks & Spencer, Royal Bank of Scotland,

Serco and Wolseley - paid more to their pension schemes than they paid

in dividends to shareholders.

iBoxx over 15 year AA rated corporate bond yields

8.0

7.5

7.0

6.5

6.0

5.5

5.0

4.5

4.0

3.5Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

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% p

a)

Source: Markit iBoxx

3.5% paBy the end of May 2012

corporate bond yields had

fallen by 3.5% pa from their

peak in late 2008.

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The chart below shows how company payments into pension schemes

have changed since 2005 and how they might increase in future.

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Deficit contributions (defined benefit)

Employer service cost (defined benefit)

Employer defined contribution costs

Employer contributions to pension schemes (£ billion)

2005 2006 2007 2008 2009 2010 2011 Estimate postauto-enrolment

£ b

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There is no sign that contributions will fall any time soon. In fact, since the

end of 2011, BT has made a deficit contribution of £2 billion - this tops the

£1.8 billion paid by Barclays as the largest ever one-off deficit payment to

a UK pension scheme.

In general, contributions to defined benefit pension schemes are set every

three years. Whilst in some cases the contributions agreed at the last

funding valuation will continue to be sufficient to meet current deficits,

with many valuations being carried out at the end of 2011 and early 2012

- when funding positions were particularly stretched - we may still see

another step increase in the deficit contributions being paid by companies

to their pension schemes.

We also expect to see a significant increase in the contributions made

by companies to defined contribution schemes, as the requirement

to automatically enrol qualifying employees into a pension scheme

begins to come into force later this year. We have shown in the chart

above an indication of the level of contributions that companies would

need to pay once auto-enrolment takes effect, on the assumption

that they make no changes to their existing pension arrangements

so that auto-enrolment costs are additional. We have also allowed for

a rise in deficit contributions commensurate with recent changes in

deficits. It seems likely that, faced with such increased costs,

companies will decide to modify their existing schemes to provide

lower benefits or contributions.

Further detail on auto-enrolment is set out in section 3.

£26bnThe estimated level of annual

contributions to FTSE 100

pension schemes following

auto-enrolment.



Alternatives to cash fundingAs well as paying large contributions into their pension schemes,

FTSE 100 companies continue to make use of alternative forms of funding.

BAT, Experian, Legal & General, Reckitt Benckiser, Rio Tinto, Scottish & Southern Energy, Smith & Nephew and Standard Life all disclosed

having company guarantees in place for some or all of their defined

benefit schemes. Where suitably structured, cross-company guarantees

can also help to reduce the annual levy payable by the pension scheme

to the Pension Protection Fund (PPF). In some cases these levies can be

significant - International Airlines Group disclosed that costs in relation to

PPF levies were €9 million during 2011.

AstraZeneca, BAE Systems, Diageo, International Airlines Group, Man,

Rexam and Smiths all disclosed having paid additional contributions to

an escrow account or separate trust that would become payable to the

pension scheme on the occurrence of certain events, such as insolvency

of one or more of the participating employers.

Other companies have provided similar security by granting their pension

scheme a charge over certain assets:

� Centrica disclosed that its pension schemes have been granted a charge

over the Humber power station.

� InterContinental Hotels Group has provided a charge over one hotel,

valued at $85 million, to its pension scheme.

� International Airlines Group disclosed that its pension schemes

have access to letters of credit totalling €275 million which are secured

on aircraft.

� The Rexam pension scheme has a charge over canning facilities and

machinery, enforceable before 1 January 2013 in the event of a default on

contributions to the scheme or a material decline in the strength of the

employer’s covenant.

� Vodafone has provided a charge in favour of the trustee of its pension

scheme over UK index-linked government bonds held by the company.

We continue to see new funding arrangements emerging, with United Utilities entering into an inflation mechanism with its pension scheme.

Under this mechanism additional contributions will be paid in periods

where inflation exceeds 2.75% pa. This appears particularly appropriate

given that the company has a natural hedge against inflation through its

regulated pricing structure.

We have also seen companies agreeing to pay additional pension

contributions that are dependent on the performance or activities of

the business:

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� BT has agreed that one third of any net proceeds from disposals

and acquisitions in excess of £1 billion during any 12-month period

will be paid into its pension scheme. In addition, BT had promised

that contributions to the pension scheme would be at least as large

as payments made to shareholders over the three years to

31 December 2011.

� InterContinental Hotels Group has agreed that 7.5% of the net proceeds

of any hotel disposals will be paid into the pension scheme with

additional payments dependent on the growth in the group’s earnings

above specified targets.

� Invensys has said that at least 8% of the proceeds of any business sale

exceeding £1 million will be paid into the pension scheme.

� Whitbread has promised that the pension scheme will participate in any

increases in ordinary dividends in excess of RPI and will have the right to

consultation before any special distribution can be made.

Last year we reported in detail on the partnership arrangements that

some companies have recently set up with their pension scheme trustees.

Typically, these work as follows:

1. Assets of the company are transferred into a newly created

partnership. Usually property is transferred, although Diageo has

instead transferred stocks of whisky into a partnership with its

pension scheme trustees and GKN has sold the licence over its

trademark and royalty rights to its pensions partnership.

2. The company makes a one-off contribution to the pension scheme,

which is then invested in the partnership in return for the pension

scheme having the right to income generated by the partnership

assets. In some cases, the right to receive this income may be

contingent on other events - for example, the level of dividends

paid by the company.

3. The partnership is structured so that its assets would transfer into

the pension scheme on the sponsoring employer’s insolvency.

4. After a specified period the assets in the partnership revert to the

company, possibly with a further contingent payment from the

partnership to the pension scheme to ensure that the scheme is

fully funded.

For the pension scheme this arrangement provides a regular income and

additional security against the sponsoring employer’s insolvency.

For the employer, this type of arrangement has even more advantages:

� There is no requirement for an up-front cash contribution, yet the

pension scheme can place a value on the future income stream

generated by the partnership assets.

� It has in the past been possible to receive accelerated tax relief on the

expected future payments to the pension scheme from the partnership.



� The period over which the scheme’s deficit is removed can be longer

than would normally be acceptable for direct cash contributions.

� The arrangement can be structured to avoid the risk of a

trapped surplus.

� It may be possible to secure a reduction in the scheme’s PPF levy.

ITV, Kingfisher, Sainsbury’s, Tesco and Whitbread all extended their

existing pension partnerships through additional investment during 2011.

IMI, Lloyds Banking Group and Marks & Spencer also utilise partnership

arrangements but did not report extending them during the year.

In March 2012 HMRC introduced new legislation which limits the

circumstances in which up-front tax relief can be given to the companies

which fund these partnership arrangements. It remains to be seen

whether this will limit further use of these arrangements in the future.

The complexities of pensions legislation mean that companies can find

themselves with unexpected liabilities. Carnival reports that a 2011 court

order determined that it continues to retain a link to the British Merchant

Navy Ratings Pension Fund, a pension scheme that the company had

withdrawn from in 1999. As a result, Carnival estimates that it will be

required to make further contributions of $18 million to this scheme and

has made provision for this in its 2011 accounts.

Going further, in January 2012 the Pensions Regulator issued a financial

support direction requiring ITV to provide support for the Boxclever

pension scheme. ITV had previously received cash proceeds of around

£500 million from transactions involving Boxclever, prior to its insolvency

in 2003. However, with the decision being appealed, this case is likely to

run on for some time before any firm conclusion is reached.

2.5 The end of final salary pensionsThe trend for companies to reduce levels of defined benefit pension

provision has continued.

Royal Dutch Shell has announced plans to close its final salary scheme

to new employees in the next year and BAE Systems will be closing its

hybrid scheme - which provides a combination of final salary and defined

contribution benefits - to new entrants during 2012. Following these

closures, none of the FTSE 100 companies covered in this report will

continue to offer a final salary pension to new employees.

Aviva, G4S, Man, Schroders and Tate & Lyle all closed their defined

benefit pension schemes to future accrual for existing members during

2011. Whilst G4S and Man have retained a link to final salary for accrued

benefits, the other three companies have reflected a gain in their accounts

due to the lower level of deferred revaluation that will now apply in future

on benefits that have already built up.

0The number of FTSE 100

companies providing a final

salary pension scheme to

new employees.

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Kingfisher and Severn Trent have both announced plans to close their

pension schemes to future accrual in 2012. InterContinental Hotels Group

will be closing to accrual from 1 July 2012, and as a result recorded a

$28 million gain in its 2011 accounts.

Whilst not ceasing all defined benefit accrual, existing Unilever employees

will move from a final salary scheme to a career average revalued earnings

(CARE) basis with effect from July 2012.

A common change in recent years has been to impose a cap on future

increases to pensionable pay. However, Centrica was the only company

reporting such a change this year, with increases being restricted to

a maximum of 2% pa from 2012. As a result, Centrica disclosed a

£333 million reduction in pension liabilities in its 2011 accounts.

Lloyds Banking Group had already introduced a cap of 2% pa on increases

in pensionable pay but now reports that it faces a legal challenge from

scheme members over this change.

More fundamental pension changes are proposed by Morrisons,

which will be setting up a new “cash balance” scheme for all employees in

the next year. Under a cash balance scheme members accrue entitlement

at retirement to a monetary amount based on final salary and service,

which they then use to purchase an annuity with an insurance company.

This new scheme has been commended by the Pensions Minister,

Steve Webb, as meeting his vision for a “defined ambition” pension

scheme, which shares risk more evenly between employers and

employees than existing pension schemes. In the case of a cash

balance scheme pre-retirement investment risk is met by the employer;

the employee takes on post-retirement risks, through the uncertain terms

on which an annuity may be purchased at retirement.

Another significant change is being made by Tesco, where retirement

age will shortly increase from 65 to 67, with further increases possible if

life expectancy continues to rise. At present retirement ages above 65 in

occupational pension schemes are very rare. Again, this change has been

highlighted by the Pensions Minister as enabling defined benefit provision

to continue at an affordable cost.

2.6 The continuing change to CPI inflationIn last year’s report we commented on the initial fallout from the

government’s announcement in July 2010 that the inflation measure

applying for statutory increases to benefits from occupational pension

schemes would change from the Retail Prices Index (RPI) to the Consumer

Prices Index (CPI).



As companies have now had time to consider the impact of this change on

the benefits provided by their schemes, we are seeing an increasing number

of gains being disclosed as a result. By the end of 2011 around half of the

FTSE 100 companies with defined benefit pension schemes had shown a

saving due to this change. The £3.5 billion gain disclosed by BT in its

March 2011 accounts remains by far the largest. Of the companies reporting

at the end of 2011, HSBC disclosed the largest gain - $587 million.

It is perhaps surprising that more companies have not disclosed a change

in inflation measure in their 2011 accounts. We are unable to tell whether

this is simply because no change to CPI indexation applies in their pension

schemes, or because for their schemes, the position remains uncertain.

In the last year we have seen several legal challenges for and against the

switch to CPI inflation. In November 2010, a collection of trade unions

argued against the validity of the government’s change to CPI inflation in

public sector schemes, but this was rejected by the High Court with the

decision subsequently upheld following appeal.

In the private sector, former trustee Mike Post has been one of the

most vocal opponents to the change to CPI, having led the challenge to

maintain RPI inflation in the British Airways pension schemes (part of

International Airlines Group since February 2011). However, with pension

increases having already been granted based on CPI, it seems unlikely that

there will be any change back to RPI inflation.

A High Court case in February 2012 may have opened the doors for more

schemes to adopt a change in the inflation measure they use. In this

case, regarding the QinetiQ pension scheme, it was determined that CPI

inflation could be used as the basis for increases to benefits - including

those that members had already built up - as the scheme rules allowed

the use of a replacement inflation index. As many schemes have similar

wording in their rules, the implications of this case could be far reaching.

Since the change in inflation measure was announced in 2010, the Office

for Budget Responsibility (OBR) has published a report which suggests

that the long-term difference between RPI and CPI is likely to be larger

than originally anticipated. We have seen evidence of this in the gap

between the CPI and RPI assumptions adopted this year, with many

companies that had already recorded a gain from the change to CPI

inflation in their 2010 accounts reflecting a further saving in 2011.

For example, BAE Systems disclosed a £348 million gain from the change

to CPI in its 2010 accounts and has now reflected an additional reduction

of around £175 million in IAS19 liabilities following an increase in the

assumed gap between RPI and CPI inflation in its 2011 accounts.

50%Around half of FTSE 100

companies allowed for a

change to CPI inflation in

their 2011 accounts.

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The widening gap between RPI and CPI worsens the position for many

pension scheme members, who will now receive even lower benefits than

they had previously been led to expect.

Changes to RPI as well?In a further twist to the uncertainty regarding inflation measures there has

recently been speculation that the method of calculating RPI could be

changed to bring it more in line with the CPI inflation formula. This follows

work carried out by the Consumer Prices Advisory Committee and related

bodies at the ONS to look at whether the mathematical formula underlying

the RPI calculation should be brought into line with that applying under

the CPI calculation. As the “formula effect” accounts for the majority of

the expected long-term gap between RPI and CPI, a change could result in

a decrease in future RPI inflation.

In mid-June the ONS released a consultation document on this issue.

In this it states that it has the explicit aim of understanding, explaining and

eliminating any unjustifiable and unnecessary gap between the measures.

A change to RPI, if it came through, would benefit those companies with

pension benefits that remain tied to this inflation measure (and further

reduce members’ benefits). However, it would also affect the receipts

from, and therefore valuations of, index-linked government bonds, which

makes it difficult to gauge the overall financial impact on FTSE 100

companies.

2.7 Reducing risk in pension schemesDuring 2011 we have seen a marked decrease in the proportion of assets

that FTSE 100 pension schemes hold in equities. The graphs below show

the splits at the start and end of 2011 for companies that have December

reporting dates - for these schemes the average proportion of assets held

in equities fell from 42.5% to 34.8% over the year. Non-UK schemes have

been excluded where possible.

December 2011

Equities34.8%

Bonds45.7%

Other19.5%

December 2010

Equities42.5%

Bonds40.6%

Other16.9%



As bonds outperformed equities during 2011 part of the reduction in equity

holdings reflects market movements, rather than any active reworking of

investment strategies. However, regardless of the reason for the change,

FTSE 100 pension schemes had significantly less risk in their investment

strategies at the end of 2011 than was the case at the end of 2010.

Several companies do appear to have taken active steps to reduce the

level of equities held. For example, BG Group reduced the proportion held

in equities from 76% to 60% and Aviva reduced the proportion of equities

in its UK pension schemes from 26% to just 7% at the end of 2011.

There were very few companies that reported an increase in the allocation

to equities. Of those that did, Carnival disclosed the largest change -

a 10% increase in equity allocation, up from 34% to 44%.

Whilst moving assets from equities to bonds reduces investment risk,

companies can still be left with other significant risks in their pension

scheme. Most notable is longevity - the risk that pension scheme

members live longer than expected and the cost of providing their

pensions increases. During 2011 International Airlines Group, ITV and

Rolls-Royce all took steps to remove this risk by entering into a

“longevity swap” with an insurance company or bank. Under this type

of arrangement, the counterparty provides additional payments to the

pension scheme if members live longer than assumed.

In order to transfer all pensions risk to a third party, companies can

purchase a bulk annuity policy with an insurance company (a “buy-in”

or “buy-out”) - something that a number of FTSE 100 companies have

done since the market for this business took off at the start of 2007.

During 2011 Smiths purchased a buy-in policy which removed the

longevity, investment and inflation risk for £147 million of pensioner

liabilities. Legal & General and Resolution also purchased pensioner

buy-in policies during 2011, which added to the existing policies already

held by their pension schemes, and covered new groups of pensioners.

Although the cost of buying out the benefits for all members is currently

too high for most companies to consider, buy-in policies covering just

pensioners can offer good value when compared to the IAS19 accounting

liability or the technical provisions required by the scheme’s trustees.

This is illustrated in the chart opposite. Schemes that invest heavily in

government or corporate bonds may find these policies attractive given

the large rise in value of these asset classes over the last year.

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“Liability management” exercises are another way in which companies

can reduce pensions risk through the removal of benefits from the

pension scheme.

There are two main types of exercise:

1. Enhanced transfer value exercises, under which deferred members are

offered an enhancement to the value of their benefits, or some other

inducement, such as a separate cash payment, if they transfer their

benefits out of the pension scheme.

2. Pension increase exchanges, whereby pensioners are offered a higher

current level of pension in return for agreeing to waive their rights to

some or all of the future increases on their pension.

GKN, IMI and Man all carried out enhanced transfer value exercises during

2011. It appears that these were effective in reducing liabilities - and

pensions risk - with Man reporting that 36% of the scheme’s deferred

members took up the offer of an enhanced transfer value, removing

£29 million of IAS19 liabilities from the pension scheme. IMI has also

offered pensioners the option of exchanging future increases on their

pensions in return for a higher level of pension from the start of 2012.

When structured carefully, exercises such as these can be beneficial

to companies in reducing their exposure to pensions risk and can also

offer pension scheme members an option that many value highly.

Source: LCP research

Dec2007

Jun2008

Dec2008

Jun2009

Dec2009

Jun2010

Dec2010

Jun2011

Dec2011

70

80

90

100

110

120

130

140

Pen

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liab

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dex

Buy-in price

Technical provisionsCompany accounting liability

Divergence in pricing

Lehman Brothers’ insolvency

Convergencein pricing

Pensioner buy-in pricing



However, some liability management exercises have been criticised for

offering poor value for money or for unfairly inducing members to give

up valuable benefits.

In October 2011 the Pensions Minister announced that the government

would act to root out bad practices in this area. The first step is an

FSA consultation released at the end of February 2012, which is likely

to make it harder for financial advisers to recommend that members of

defined benefit pension schemes transfer their pensions elsewhere.

More recently, in June 2012, a new code of practice has been published.

This was developed by an industry working group and relates to companies

who undertake these types of exercise. The code strongly discourages cash

incentives in relation to enhanced transfer exercises and sets guidelines

for the provision of detailed information or, in some cases, advice, where

employees are offered the opportunity to give up future pension increases.

2.8 Life expectancy increasing more slowly?Once again most companies assumed longer life expectancy in their 2011

accounts than in 2010. Across the FTSE 100, a 65 year old man is now

assumed to live past age 87. This continues the trend seen since the

current accounting standard was introduced in 2005, with the change in

average assumption for a man aged 65 shown in the chart below.

However, the rate of increase has slowed from the very rapid increases in

assumed life expectancy seen from 2006. In fact, in 2010 three companies

reduced their assumption about how long members would live and this

year five have done so.

Next revealed that the modified mortality assumption used for its

2011 accounts reduced the value of IAS19 liabilities by £14 million.

CRH, Kingfisher, Morrisons and Pearson were the other companies

that disclosed shorter life expectancy for at least some members of

their UK schemes.

88

87

86

85

84

83

Life expectancy for a male aged 65

2005 2006 2007 2008 2009 2010 2011

Exp

ecte

d a

ge

at d

eath

FTSE 100 companies reduced their equity holdings to just 35% of pension scheme assets by 31 December 2011, the lowest level for more than a generation.

As well as reducing investment risk, 2011 saw companies seeking to remove other risks by taking out longevity swap contracts or completing a “buy-in” of pensioner liabilities.

Bob Scott

Partner LCP

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30

Contentp30 3. Developments in UK

pension provisionp32 3.1 “ Defined ambition”,

auto-enrolment,

...what next?

p33 3.2 “Red tape challenge”

p33 3.3 The new European

Pensions Directive

p35 3.4 Auto-enrolment

The Government says it wants employers to provide decent pensions. Yet the current regulatory, tax and compliance regime puts significant hurdles in the way of companies who offer defined benefit pensions. And, as we look to the future, we see auto-enrolment bringing huge administrative challenges to most companies; European legislation threatening to require insurance-style reserving; and the DWP pushing schemes to incur disproportionate costs to “equalise” GMPs.

Bob Scott

Partner LCP

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3. Developments in UK pension provision32

The pace of change in UK pension provision shows no sign of slowing.

During 2011, companies continued to seek ways to “de-risk” their pension

schemes and to reduce their overall pension liabilities. The change from

RPI to CPI provided some respite for employers with defined benefit

pension schemes and, in the early part of 2011, as asset values rose,

a number of companies could contemplate a future with their schemes

either “self-sufficient” or bought out with an insurance company.

Funding pressuresThe latter half of 2011 saw considerable turmoil in financial markets with

global equity markets falling, the future of the Euro in question, and a

“flight to quality” as many investors moved money into UK government

bonds. Within the UK, the Bank of England continued its programme

of quantitative easing in an attempt to stimulate economic activity.

The result was that by the end of 2011, as gilt yields had fallen to record

lows, funding deficits had increased significantly and sponsors of defined

benefit pension schemes faced renewed demands from trustees for

increased funding.

Against this background, the Pensions Regulator has issued the first in

a series of annual statements on scheme funding in which it offered no

direct respite to employers with pension scheme valuations at the end

of 2011 but instead emphasised the “flexibility” within the scheme

funding framework.

A key part of the Regulator’s statement was an indication that schemes

should build on existing recovery plans, with contributions at least

maintained in real terms. Accordingly, we are unlikely to see any overall

reduction in deficit contributions for FTSE 100 companies for the

foreseeable future. Many companies may increase their contributions or,

like BT, pay large one-off contributions when their cashflow position allows.

3.1 “Defined ambition”, auto-enrolment, …what next?The Pensions Minister has talked enthusiastically of “defined ambition”

(DA) pension schemes. These would provide more certainty to members

than a straight defined contribution arrangement but would be less

onerous for employers than full defined benefit schemes.

Whilst the Minister’s support for such arrangements is to be welcomed,

there must be some doubt as to whether he can deliver the necessary

legislative framework and, even if he could, whether companies would

embrace DA schemes. To date, there have only been a few examples -

Tesco and Morrisons are both mentioned in this connection - that have

implemented such schemes but, for most, defined contribution remains

the preferred route.

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3. Developments in UK pension provision

Indeed, whilst the forthcoming auto-enrolment requirements are set to

increase significantly the number of individuals building up some form of

work-based pension provision, many employers are likely to provide only

the minimum level of required contributions and only a very small minority

are expected to auto-enrol their employees into a defined benefit or

DA pension scheme.

Therefore, it is unlikely that auto-enrolment on its own will solve the

growing problem of insufficient pension provision at retirement.

3.2 “Red tape challenge”The DWP has also announced a “red tape challenge” in which layers

of unnecessary regulation are to be removed. Sadly, this seems likely

to go the way of most civil service initiatives to reduce bureaucracy,

particularly as both contracting-out and auto-enrolment legislation are

to be excluded and, we are told, there must be no “winners and losers”.

Indeed, the DWP issued a separate consultation on “equalising”

Guaranteed Minimum Pensions (GMPs). These are a relic from 1997

and the rules surrounding their calculation and payment are already

bewilderingly confusing and complex. To attempt to “equalise” GMPs

(which are only unequal as they are a substitute for unequal State

benefits) would be expensive to implement, complex to administer and

would provide relatively small adjustments to members’ benefits.

In our view such an exercise clearly contradicts both the Pensions

Minister’s desire to encourage employers to provide better pensions and

the “red tape challenge”.

3.3 The new European Pensions DirectiveThe move away from defined benefit pension provision looks set to

continue with a new European pensions directive likely to significantly

increase the burden on employers who sponsor a defined benefit

pension scheme.

Consultation on the directive commenced in late 2011. The stated intention

is to achieve convergence of the insurance and pension regimes and

greater harmonisation of pension supervision across European states.

Although there is still some way to go until any proposals are finalised,

and we have recently learned of a further delay to the process, the

changes being suggested could result in significantly higher funding

targets for defined benefit pension schemes as well as a substantial

increase in reporting, disclosure and governance requirements.


3. Developments in UK pension provision34

One of the key proposals is that every funded pension scheme will be

required to produce a “holistic” balance sheet. This would set out a

valuation of the scheme’s assets covering:

� financial assets eg invested assets (at market value);

� financial contingent assets eg any security over other assets; and

� sponsor covenant and pension protection schemes. This would include

future recovery plans, perhaps a formal valuation of covenant strength

and, potentially, a value placed on the reliance on the PPF.

These assets would then be compared to a “risk free” valuation

of liabilities, with additional allowance for risk buffers and capital

requirements. This is similar to the liability valuations that will shortly

apply for insurance companies under the long delayed Solvency II,

with different tiers of assets required to cover the various elements

of the liability valuation.

An example of what this might look like for the pension schemes of the

FTSE 100 as a whole is shown below.

If pension schemes were required to adopt the Solvency II type reserving

that will shortly apply for insurance companies, then we estimate that the

funding requirements for FTSE 100 companies could increase by up to

£200 billion.

At least initially, the introduction of a new pensions directive would not

impact IAS19. However, with the general direction of travel being towards

measurement of pension liabilities on a “risk free” basis, accounting

valuations of pension liabilities could yet increase significantly.

Assets Liabilities

Sponsor covenant and pension protection schemes

Financial contingent assets

Financial assets

Excess of assets over liabilities

Risk bu�er

Risk free valuationof liabilities

£200bnThe possible increase in

funding requirements for

FTSE 100 companies under

the proposed European

pensions directive.

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3. Developments in UK pension provision

3.4 Auto-enrolmentAs noted above, from October this year larger employers will start

to be required to enrol all qualifying employees automatically into

a pension scheme that meets certain minimum quality standards.

Eventually, by 2017, all employers will be required to comply.

Once the arrangements are fully in place, the broad requirement will

be for contributions of 8% of qualifying earnings - including a minimum

employer contribution of 3% - to be paid into a defined contribution

pension scheme for all qualifying employees, unless they actively choose

to opt out of the system. Alternatively, companies can automatically

enrol employees into a suitable defined benefit or hybrid pension

scheme. Those that do will have the option to defer until October 2017.

The “big four” supermarkets will be the first companies required to

implement auto-enrolment from 1 October 2012. Morrisons and Tesco

have indicated that they plan to use their existing pension schemes

(following the changes set out in section 2.5) for auto-enrolment from

this date. Sainsbury’s and Asda are expected to auto-enrol employees

into defined contribution schemes.

36

Contentp36 4. Accounting standards

for pensionsp38 4.1 Reduced profits for

most companies

p39 4.2 Removal of “corridor”

will hit some

balance sheets

p40 4.3 New disclosure rules

p40 4.4 Other changes

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New accounting rules will mean fewer options for companies reporting after 2013, lower profits for many and, possibly, more focused and appropriate pensions disclosures.

Nick Bunch

Partner LCP


4. Accounting standards for pensions38

New rules on accounting for pensions are fast approaching, with a revised

version of the international pensions accounting standard IAS19 to come

into force next year.

The impact will vary greatly from company to company - most will see a

hit to profits although some others will see their profits improve, and a

few will see their balance sheets damaged. All will need to include extra

information on their pension risk in their accounts.

Under the new standard companies’ 2013 accounts will also need to

show the 2012 figures recalculated under the new rules. We estimate

that FTSE 100 companies’ 2012 profits will be over £2 billion lower when

recalculated under the new standard but with the impact unevenly spread

among companies. This will affect comparisons between companies under

commonly used measures such as earnings per share.

4.1 Reduced profits for most companiesAt present, companies estimate at the start of each year the rate of

return they expect to earn on their pension scheme assets over the year.

This amount is then credited to profit.

In future, the credit to profit will be calculated using the IAS19 discount

rate, which is based on the yields on AA-rated corporate bonds and is

usually lower than the return that might be expected from a balanced

portfolio of equities, bonds and other assets. Therefore, the credit to

profit will be lower for most companies. This is illustrated in the graph

below, with each bar showing the estimated change in 2011 profits caused

by this change for an individual company.

Estimated impact of removal of expected return on assets on 2011 profits

100

0

-100

-200

-300

-400

-500

BT

BP

Royal Dutch Shell

Aviva

Rolls-Royce

£ m

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£2bnWe estimate that profits for

FTSE 100 companies in 2012

will be over £2 billion lower

when recalculated using the

new accounting standard.

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4. Accounting standards for pensions

However, some companies that sponsor pension schemes with conservative

investment strategies will see higher profits under the new standard.

For example, Aviva now has less than 10% of pension scheme assets invested

in equities. We estimate that under the new rules profits would have been

around £70 million higher in 2011 and with the lower allocation to equities

applying at the end of 2011, would be £180 million higher in 2012.

4.2 Removal of “corridor” will hit some balance sheetsUnder the current IAS19 standard companies have the choice of dealing

with “unexpected” gains and losses, such as those caused by movements

in the stock market, in two ways:

� Recognise all gains and losses immediately outside of profit and loss.

� Recognise only actuarial gains and losses that exceed a specified level

(often called a corridor) and spread these over an extended period.

The new version of IAS19 removes the second of these options.

The company most affected by this change is Royal Dutch Shell, which

had unrecognised losses of £10 billion at 31 December 2011. These mainly

represent losses caused by the financial turmoil of recent years which have

not yet been recognised in the balance sheet. The nine companies in the

FTSE 100 that use the “corridor” option will see these losses recognised

immediately on their balance sheets under the new standard, weakening

the balance sheet and bringing increased volatility in future.

Even though only a small number of companies in the FTSE 100 are

affected, balance sheets will receive a total hit of some £14 billion as

shown below.

Even though only nine companies in the FTSE 100 are affected, balance

sheets will receive a total hit of some £14 billion as follows:

Asset/liability recognised at 2011 year-end before deferred tax

CompanyCurrent

(£ million)New IAS19 (£ million)

Difference (£ million)

Old Mutual 54 44 (10)

Man 57 22 (35)

Glencore (39) (145) (106)

BG Group (67) (210) (143)

Evraz (192) (337) (145)

Lloyds Banking Group 1,131 592 (539)

International Airlines Group 877 (360) (1,237)

Barclays 1,653 (75) (1,728)

Royal Dutch Shell 5,871 (4,111) (9,982)

Total (13,925)

40 LCP Accounting for Pensions 2012

4. Accounting standards for pensions

Although their balance sheets will be affected, these companies will

show higher profits as they will no longer have to amortise these past

losses. For example, Royal Dutch Shell had a charge to profit of around

£350 million in 2011 that won’t be seen in future under the new standard.

This will help offset the reduction in profit caused by the removal of the

“expected return on assets”.

4.3 New disclosure rulesUnder the revised IAS19 accounting standard, there will be fewer

prescriptive rules and a greater emphasis on broad principles.

For example, companies will be required to explain the characteristics

of their pension schemes and the risks associated with them.

In theory, this should mean longer and more meaningful disclosures for

those companies whose pension risks are material and possibly shorter

more focused disclosures for companies whose pension risks are small

relative to the size of their business.

4.4 Other changes In addition to the main changes outlined above, the new IAS19 standard

includes a number of detailed changes to the rules. These include:

1. Changes to the way that companies must account for the running

costs of pension schemes.

2. Many changes to the rules on “special events”, such as how pension

scheme restructurings, redundancies and benefit changes are treated

in the accounts.

3. Changes to the way that liabilities are valued for some pension

schemes with unusual features - such as those where risks are shared

with employees - and schemes outside the UK.

Acc

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42

Contentp42 5. LCP’s analysis of FTSE 100

IAS19 disclosuresp44 5.1 Introduction

p44 5.2 Analysis of results

p49 5.3 Key assumptions

Assumptions for life expectancy increased again in 2011, but at a slower rate than seen in recent years. A handful of companies even reduced their assumptions on how long their employees will live.

Nick Bunch

Partner LCP

88

87

86

85

84

83

Life expectancy for a male aged 65

2005 2006 2007 2008 2009 2010 2011

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1 Allows for a £165 million investment

in group insurance policies.


5. LCP’s analysis of FTSE 100 IAS19 disclosures44

5.1 IntroductionWe have analysed 83 FTSE 100 companies reporting in 2011.

17 companies were excluded as they did not sponsor a material defined

benefit pension scheme. A full listing can be found in appendix 1.

We have concentrated on the financial position of the defined benefit

pension schemes in which the companies’ employees and former

employees participate. Some companies offer post-retirement

healthcare, which we have excluded from our analysis, where possible.

Overseas pension arrangements have been included, except where

otherwise indicated. We have analysed these arrangements in more

detail in section 6.

The disclosuresThe average pensions note runs to nearly five pages, with most

companies also having several paragraphs of pension commentary in

the main body of their reports. The longest disclosure was by Prudential, which dedicated 13 pages of its 2011 report to pensions.

For many FTSE 100 companies, pensions are financially significant and

the volume of information disclosed in the accounts reflects this.

However, for those companies whose pension arrangements are not so

material, even the minimum disclosure requirements under IAS19 can be

quite onerous. We have referred in section 4 to the forthcoming changes

in these disclosure requirements.

5.2 Analysis of resultsFunding levelsIAS19 takes a snapshot of the accounting surplus or deficit at the

company’s year-end and, if the company has not chosen to spread gains

and losses via the “corridor” option, this is generally the number that

appears on the balance sheet.

We have set out a full list of the disclosed accounting surpluses and

deficits of the FTSE 100 companies in appendix 1.

18 companies out of the 83 FTSE 100 companies disclosed assets equal to

or in excess of accounting liabilities, compared to 10 last year.

Prudential disclosed the highest 2011 funding level - 125% as at

31 December 20111. Just over half of companies reported being less than

90% funded on an accounting basis at their 2011 year-end, which is very

similar to the position in 2010.

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5. LCP’s analysis of FTSE 100 IAS19 disclosures

Changes over 2011The chart below shows how worldwide funding levels have changed

over the year for the 52 FTSE 100 companies in our report which have

December 2011 year-ends.

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

20

15

10

5

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

Nu

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2010

2011

The average reported IAS19 funding level for companies with December

year-ends was 88% in 2011, the same as in 2010.

Sources of deficits and surplusesFor the 52 companies that produced December accounts in both 2010 and

2011, worldwide deficits did not change over 2011. This is illustrated in the

chart below.

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

New assumptions& experience

Overall movement in the deficit

Interest chargedInvestment returns and exchange rate differences

Benefits earned Contributions

30 25 20 15 10 5 0 5 10 15 20 25 30

Changes in liabilities

Changes in assets

88%The average IAS19 funding

level for companies reporting

at 31 December 2011.



Our analysis shows that investment returns (£23.2 billion) comfortably

covered “interest” charges (£16.8 billion) and contributions paid

(£13.5 billion) were well above the IAS19 value of benefits earned over

the year (£4.8 billion). All other things being equal, the aggregate

deficit would have been lower as a result.

However, changes in IAS19 liability values (£15.1 billion), primarily as

a result of lower discount rates due to lower corporate bond yields,

offset those positive effects, leading to no overall change in deficit

for these companies.

Pension schemes in relation to their sponsoring companiesThe chart below shows the size of accounting liabilities relative

to companies’ market capitalisations. The average FTSE 100 pension

liability was 49% of market capitalisation, compared with 40% in 2010.

This increase was largely due to a reduction in corporate bond yields over

2011, which increased IAS19 liability values, combined with falls in equity

markets which reduced the market capitalisation of many companies.

As a result, pension schemes still pose a very significant risk for certain

companies. For example, International Airline Group’s accounting

liabilities were over six times the value of its market capitalisation.

Accounting liabilities as a proportion of market capitalisation (%)Accounting liabilities as a proportion of market capitalisation (%)

20

15

10

5

0under 5 5

to 1415

to 2425

to 4950

to 7475

to 99100

to 149150

to 199200

or over

Nu

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2010

2011

However, for some companies, even the size of the IAS19 pension

scheme deficit is significant compared to the value of the company itself.

For example, BAE Systems’ accounting deficit was over 45% the value of

its market capitalisation at its 2011 accounting year-end.

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

compared to 5% in 2010.

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What have companies done to tackle their deficits?FTSE 100 companies paid contributions totalling £16.9 billion to their

defined benefit pension schemes in 2011. This follows £17.0 billion in

2010 and £17.5 billion in 2009. Over half of companies paid higher

contributions during 2011 than in 2010, although a few, such as GKN

and HSBC, paid significantly less as a result of having paid large

contributions in the previous year.

The six companies that paid the highest contributions are shown in

appendix 2. BT, Barclays, Royal Bank of Scotland and Royal Dutch Shell all paid more than £1 billion into their schemes over their 2011 accounting

years. Barclays paid over £2 billion, an increase of £1.5 billion from the

previous year, following the triennial valuation of its main pension fund as

at 30 September 2010.

Most companies pay contributions at a rate greater than the IAS19 value

of benefits earned over the year; if IAS19 assumptions were borne out in

reality, this excess would reduce the IAS19 deficit.

However, eight companies paid contributions lower than or equal to the

IAS19 value of benefits promised over the year. These were British Land Company, Carnival, Fresnillo, Reed Elsevier, SABMiller, Sage, Standard Chartered and Tesco.

The chart below shows the “excess” contributions that companies paid

during the year (ie contributions over and above the IAS19 value of the

benefits earned during the year) as a proportion of the deficit that would

have been disclosed at the end of the year had these contributions not

been paid.

The highest proportion of deficit paid off was by Barclays which reduced

its 2011 year-end deficit by 96%.

Proportion of year-end deficits paid off over the year (%)Proportion of year-end deficits paid off over the year (%)

30

25

20

15

10

5

0Nil or in 1 to 9 10 to 19 20 to 29 30 to 39 40 to 49 50 to 59 60 or over surplus

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2011



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

paid. Of the 65 FTSE 100 companies that disclosed a pension deficit in

2011, 26 disclosed a deficit that was greater than or equal to the dividends

paid to their shareholders in 2011. However, in 24 cases, the 2011 dividend

was more than double the pension scheme deficit at the 2011 financial

year-end.

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

25

20

15

10

5

0under

5050

to 99100

to 149150

to 199200

to 249250

to 299300

to 349350

to 399400

or over

Nu

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2010

2011

The chart below shows the company contributions paid over the 2011

and 2010 accounting years as a percentage of dividends distributed over

these periods and therefore illustrates the amount of cash paid to the

pension scheme in preference to shareholders. In 2011, ten companies paid

more contributions into their pension schemes than they distributed in

dividends during their accounting year. This is the same number as in 2010.

Contributions paid as a proportion of dividends paid (%)Contributions paid as a proportion of dividends paid (%)

25

20

15

10

5

0under

1010

to 1920

to 2930

to 3940

to 4950

to 5960

to 6970

to 7980

to 8990

to 99100

or over

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2010

2011

10The number of FTSE 100

companies that paid more

into their pension schemes

than they distributed to

shareholders in 2011.

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5.3 Key assumptionsWe consider below the various assumptions used to place an IAS19 value

on pension benefits. Where a company operates pension schemes in more

than one country, we have considered the assumptions used for the UK if

separately given. Where a company has disclosed a range of assumptions,

we have taken the mid-point.

Life expectancyUnder the IAS19 standard, companies are required to disclose any

“material actuarial assumptions”. Whilst no specific mention is made of

life expectancy in the standard, all of the companies in our survey apart

from Evraz and ICAP (where the defined benefit pension schemes are very

small in the context of the business) have disclosed some detail on this

assumption. 64 of the 83 companies with material defined benefit pension

schemes have provided sufficient information in their 2011 accounts for us

to derive basic mortality statistics - specifically a male life expectancy at

age 65 in the UK.

The following charts show the range of life expectancies assumed

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

sheet date.

Life expectancy assumptions reported in 2011Males aged 65 on the accounting dateLife expectancy assumptions reported in 2011Males aged 65 on the accounting date

25

20

15

10

5

085 or less 86 87 88 89 90 or above

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Life expectancy (rounded to nearest age)

2010

2011



In previous years, we have seen marked increases from year to year in

assumed life expectancy and in the allowance for future improvements

in life expectancy as companies have reflected the results of research

that showed people were living longer. This year, although assumed life

expectancy has increased again, the amount of the increase is much less

than in the recent past.

The average assumption was that male members in the UK who retire

at age 65 on the accounting date would live to 87.4 years - up from

87.1 years in the same companies’ 2010 accounts. However, the overall

rate of increase appears to be slowing.

Although 44 companies disclosed higher life expectancy assumptions

in 2011, adding 0.6 years on average to assumed life expectancy,

five companies disclosed lower life expectancy assumptions for some

or all of their membership. For example, Next reduced its assumed life

expectancy for a 65 year old male by 1.3 years, from 88.6 to 87.3.

British Land Company has adopted the longest life expectancy

assumption, stating in its 2011 accounts that male pensioners currently

aged 60 will live on average to age 90.

Research has shown that two of the main factors influencing life

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

interesting to analyse the FTSE 100 companies’ assumed life expectancies

by the sector in which the company operates.

In the chart opposite the horizontal bars show the average life expectancy

for a male aged 65 in the UK for each sector, for which we have followed

the Industry Classification Benchmark as published by FTSE. The vertical

lines show the extent of the variation within each sector, which in most

cases increases the greater the number of companies within the sector.

87.4The average assumption

was that a man retiring in

the UK at age 65 would live

to 87.4 years.

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5. LCP’s analysis of FTSE 100 IAS19 disclosuresA

ge

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92

90

88

86

84

82

80

2011

2010

Life expectancy assumptions reported in 2011 split by sectorMales aged 65 on accounting date

Fin

anci

als

Hea

lthc

are

Tele

com

mun

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Oil

& G

as

Ind

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Bas

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Uti

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Co

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ervi

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Co

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Companies in each sector at 31 December 2011

15 3 3 2 6 12 13 8 2

This chart shows that the highest average assumed life expectancies are

found in the financials and healthcare sectors, as last year. The lowest

average assumed life expectancies are found in the basic materials and

consumer goods sectors. However, the range of average assumptions

across sectors has tightened compared to 2010.

Future improvements in life expectancyAs well as setting assumptions to estimate how long current pensioners

will live on average, companies must also decide how life expectancies

for future pensioners will change as a result of improvements in mortality.

Allowing for future improvements can result in a significant increase

in the IAS19 value of pension scheme liabilities, and hence deficits.

54 companies disclosed enough information in their accounts to analyse

how their allowance for future improvements in mortality has changed

compared to 2010. The chart overleaf shows the allowance that these

companies have made for increases in longevity over a period of 20 years.



2010

2011

Additional life expectancy improvements reported in 2011Improvements for male members aged 65 now versus aged 65 in 2031Additional life expectancy improvements reported in 2011Improvements for male members aged 65 now versus aged 65 in 2031

25

20

15

10

5

0under

0.5 years0.5 to

0.99 years1 to

1.49 years1.5 to

1.99 years 2 to

2.49 years2.5 to

2.99 years3 to

3.49 years3.5 yearsor over

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Increase in life expectancy over next 20 years

In their 2011 accounts, FTSE 100 companies assumed that UK pensioners

retiring at age 65 in 20 years’ time will live for 2.1 years longer, on average,

than a pensioner retiring today. This is the same as the increase assumed

in 2010.

Overall, therefore, FTSE 100 companies increased their average

assumption for the life expectancy of a 65 year old in 2031 by 0.3 years,

from 89.2 years in their 2010 accounts to 89.5 years in 2011.

Discount rates and inflationThe discount rate is used to calculate a present value of the projected

pension benefits. A lower discount rate means a higher IAS19 value of

pension liabilities and vice versa.

The typical FTSE 100 company has pension liabilities that are linked to

price inflation. A decrease in the price inflation assumption will lead to a

lower level of projected benefit payments, and hence a lower IAS19 value

being placed on those benefits, all other things being equal.

We have analysed the discount rates used by 43 companies and the RPI

inflation assumption of 40 companies who reported at 31 December 2011,

together with the assumption for CPI inflation disclosed by 13 of these

companies. The results are summarised opposite.

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Discount ratesUnder IAS19 the discount rate should be based on “high quality” corporate

bonds and the duration of the corporate bonds should be consistent with

the estimated duration of the pension obligations.

The yields on high quality corporate bonds, and hence the discount rates,

will fluctuate from day to day in line with market conditions.

2010

2011

Discount rates used in December 2010 and December 2011 (% pa)Discount rates used in December 2010 and December 2011 (% pa)

35

30

25

20

15

10

5

0under

4.74.7

to 4.894.9

to 5.095.1

to 5.295.3

to 5.495.5

to 5.695.7

or over

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The average discount rate fell over 2011, from 5.4% pa in December 2010

to 4.8% pa in December 2011. Over 80% of companies with a December

2011 year-end adopted a discount rate assumption in the range of 4.7% pa

to 4.9% pa. However, Centrica adopted a discount rate of 5.4% pa, which

was 0.4% pa higher than any of the other companies reporting at this date.

Inflation (RPI) assumptionsThe chart overleaf shows the average long-term inflation assumption as

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

RPI assumption adopted decreased from 3.5% pa in December 2010 to

3.1% pa in December 2011.



2010

2011

RPI inflation used in December 2010 and December 2011 (% pa)RPI inflation used in December 2010 and December 2011 (% pa)

20

15

10

5

0under

2.92.9

to 3.093.1

to 3.293.3

to 3.493.5

to 3.693.7

or over

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For December 2011 year-ends, the highest RPI inflation assumption was

3.4% pa, adopted by Aggreko, International Power and Schroders.

At the other extreme Legal & General and RSA, who both reported at the

same date, adopted an assumption of 2.8% pa. In general, the RPI inflation

assumptions were more spread out than the discount rates adopted at the

end of 2011.

The Bank of England publishes statistics for future price inflation

implied by gilt spot rates. These showed that long-term RPI inflation

implied by 20-year gilt spot rates was around 3.3% pa at the end of

December 2011. This suggests that, in order to justify an assumption as

low as 2.8% pa for future RPI inflation, companies may be allowing for a

significant “inflation risk premium”. This represents the theoretical return

that investors are willing to forgo when investing in index-linked gilts,

in return for the inflation protection that these assets provide.

In practice, it is the discount rate net of assumed future price inflation

which is the key assumption.

The chart opposite shows the difference between the discount rate and

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

reporting as at 31 December 2010 and 31 December 2011.

Although the marked fall in corporate bond yields has been offset to some

extent by lower expectations of future inflation, the net discount rate has

still reduced since December 2010. Overall, this has had the effect of

increasing the IAS19 value of companies’ pension liabilities.

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2011

Discount rates in excess of RPI inflation used in December 2010 and December 2011 (% pa)Discount rates in excess of RPI inflation used in December 2010 and December 2011 (% pa)

25

20

15

10

5

0under

1.41.4

to 1.591.6

to 1.791.8

to 1.992

to 2.192.2

or over

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

provide have been linked to the Consumer Prices Index (CPI) rather than

the RPI. Historically CPI has generally increased at a lower rate than RPI

and is expected to do so in the future due to the different ways in which

the two inflation indices are constructed.

In practice the inflation measure applying in a particular pension scheme

depends on the wording of the scheme rules and their interaction with the

relevant legislation setting out minimum increases. Many companies have

now determined that some of the benefits in their pension scheme should

increase in line with CPI inflation and have allowed for the impact of the

change in inflation measure in their accounts.

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

emerging market practice is to derive an assumption for future

CPI inflation by deducting a margin from the assumed future level of

RPI inflation. The chart overleaf shows the range of margins used by

companies in their December 2011 and December 2010 year-end accounts,

where such information was available.



Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)

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8

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6

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4

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0under 0.5 0.5 0.6 0.7 0.8 0.9 1.0 over 1.0

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2011

In February 2011 it emerged that a change to the way in which the

ONS monitors clothing prices is expected to lead to a larger long-term

difference in future CPI and RPI inflation. This was backed up by a

working paper published by the OBR in November 2011 which suggests

a “plausible range” for the long-term difference between CPI and RPI of

1.3% pa to 1.5% pa.

It appears that companies have been taking this into account when setting

their assumptions for CPI inflation. At 31 December 2011 the average

long-term margin below RPI was 0.9% pa compared to 0.6% pa at

31 December 2010, with most companies assuming a 1% pa differential

in 2011 compared to 0.5% pa in 2010.

0.9%paThe average assumed gap

between CPI and RPI inflation

at 31 December 2011, up from

0.6% pa in 2010.

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Salary growth assumptionsFor final salary schemes the assumed rate of salary growth affects

the disclosed IAS19 liability and the cost of benefits being earned.

A lower assumption for salary growth produces a lower projected

pension and hence lower pension liabilities, as well as a lower charge

to operating income.

The average salary increase assumption (in excess of the RPI inflation

assumption) has fallen from 0.7% pa in 2010 to 0.6% pa in 2011. In recent

years a number of companies have introduced caps on increases in

pensionable salary and as a result disclosed a salary increase assumption

lower than RPI inflation.

2010

2011

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

25

20

15

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5

0under 0 0

to 0.490.5

to 0.991

to 1.491.5

to 1.992

or over

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As the number of active members in final salary pension schemes reduces,

the assumption for salary growth is becoming less significant.

Expected return on equitiesUnder IAS19 companies are not required to provide a breakdown of their

assumed asset returns on each asset class but can instead simply provide

an overall expected return for the pension assets. For those companies

where we could determine the assumption for future equity returns, there

is a wide range of values, reflecting the subjectivity in setting

this assumption.



2010

2011

Expected long-term rate of return on equities (% pa)Expected long-term rate of return on equities (% pa)

25

20

15

10

5

0under 6 6

to 6.496.5

to 6.997

to 7.497.5

to 7.998

to 8.498.5

or over

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The lowest equity return assumption was 5% pa, disclosed by Resolution,

and the highest was 8.5% pa, adopted by Kingfisher. Where disclosed,

6 companies increased their assumed equity return, 35 reduced it and

16 companies did not alter their assumption from the previous year.

The average expected rate of return on equities was 4.0% pa higher

than the long-term yield available on gilts, measured by reference

to the FTSE over 15 year gilt yield index at the balance sheet date.

This difference can be said to represent companies’ views of the

so-called “equity risk premium”, which is the additional return expected

from investing in equities, compared with low risk assets such as gilts,

to compensate for the increase in risk. The average equity risk premium

has increased from 3.5% pa in 2010.

As highlighted in section 4, with the upcoming changes to IAS19,

the expected return on assets assumption will shortly be redundant.

At 31 December 2010, the average assumed difference between RPI and CPI was 0.6% pa. This had widened to 0.9% pa by 31 December 2011, with most companies assuming a gap of 1% pa.

Nick Bunch

Partner LCP

Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)Difference in RPI and CPI inflation assumptions used in December 2010 and December 2011(% pa)

9

8

7

6

5

4

3

2

1

0under 0.5 0.5 0.6 0.7 0.8 0.9 1.0 over 1.0

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60

Contentp60 6. Non-UK schemes of FTSE

100 companiesp62 6.1 Significance of non-UK

arrangements

p64 6.2 Deficit and risk

reduction measures

p66 6.3 Consistency of

assumptions

p68 6.4 European Pensions

Directive

FTSE 100 companies continue to adopt different life expectancy assumptions for employees in different countries, particularly the UK and US. It is not clear that this is always justified.

Shaun Southern

PartnerLCP

Lif

e ex

pec

tan

cy (

year

s)

92

90

88

86

84

82

80

201120102009

Disclosed life expectancies for a male at age 65 at the accounting date

Number of companies with pension schemes in each country for 2011

UK US Canada Germany Netherlands Ireland Switzerland

64 21 4 6 4 4 3

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6. Non-UK schemes of FTSE 100 companies62

We have separately analysed the disclosures made by FTSE 100 companies in relation to their non-UK pension and post-retirement healthcare schemes and compared these to their UK disclosures.

6.1 Significance of non-UK arrangements45 FTSE 100 companies provided separate details of non-UK pension

liabilities amounting to £55 billion, of which over £20 billion was for

US schemes.

The average IAS19 funding level in 2011 was 71% (2010: 70%) for their

non-UK pension arrangements compared to 96% (2010: 93%) for the

UK schemes of the same companies. This reflects, among other factors,

different practices in overseas countries regarding the separate funding

of their post-retirement liabilities.

The chart below shows the 15 companies with the largest disclosed

non-UK pension liabilities relative to market capitalisation.

Disclosed non-UK pension liabilities as proportion of market capitalisation (%)

Rexam

BAE Systems

GKN

International Airlines Group*

Tate & Lyle

CRH

Smiths

BP

Evraz

Meggitt

RSA

Aviva

IMI

HSBC

Rolls-Royce

*No 2010 figure is shown as the group was formed in 2011

0 10 20 30 40 50 60 70 80 90 100

20112010

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6. Non-UK schemes of FTSE 100 companies

The chart below shows the 15 companies that disclosed the highest

non-UK pension liabilities as a proportion of the total pension liabilities.

CRH and WPP have over 60% of their total pension liabilities in overseas

pension schemes.

Disclosed non-UK pension liabilities as proportion of total pension liabilities (%)

CRH

WPP

Smith & Nephew

Rexam

BP

Standard Chartered

Anglo American

AstraZeneca

Meggitt

Tate & Lyle

Diageo

Intertek

GlaxoSmithKline

InterContinental Hotels Group

HSBC

0 10 20 30 40 50 60 70 80 90 100

2011

2010

A number of very large multinationals including BAT, BHP Billiton,

Imperial Tobacco, National Grid, Royal Dutch Shell and Unilever provide

figures only for their global pension liabilities and do not provide any

breakdown by country or region. The 2011 pension liabilities for these

companies amounted to £91 billion, with the non-UK part likely to be a

significant proportion of the total liability.



In addition, a number of FTSE 100 companies, including Evraz, SABMiller and Xstrata, have most, if not all, of their pension liability outside the UK

and have been excluded from the chart above.

6.2 Deficit and risk reduction measuresA number of FTSE 100 companies have provided details of measures that

they have taken to reduce pension deficits and reduce pension risks in

their non-UK schemes. Examples are given below.

As seen in the examples above, a number of FTSE 100 companies have

taken some significant steps to reduce their non-UK pension risks.

Progress made in this strategy varies between countries. Based on our

analysis of the disclosures of FTSE 100 companies combined with our own

experience, we illustrate opposite key risk exposures remaining in different

locations together with the development of the insurer buy-out market.

Company Reported deficit and risk reduction measures

Anglo American Schemes in Southern Africa ceased future accrual of benefits.

CRHImplemented changes to a number of its schemes in the

Eurozone and Switzerland giving rise to a gain of €29 million.

IMIDuring the year four defined benefit arrangements were

wound-up, one was closed to new entrants and one to

future accrual.

Tate & LyleThe company closed its main US pension schemes to future

accrual from 1 January 2011.

Marks & SpencerEmployees’ future annual increases in pensionable pay in the

Irish pension scheme were capped at 4% giving rise to a

one-off pension credit of £10.7 million.

No

n-U

K s

chem

es

of

FTSE

10

0 c

om

pan

ies



Significant risk exposures remain globally, most notably investment risks

in the US and recognition of longevity risk in Germany. Compared to the

UK, most countries lag behind in addressing pension risks both in terms of

closure to accrual and development of insurer transfer solutions.

Exposure to volatile asset classes

Low HighNetherlandsGermany

IrelandUKUS

Canada

Switzerland

US

Canada

Switzerland

Netherlands

Germany

UK

Ireland

Exposure to inflation

Low High

Recognition of longevity

High UKIreland

NetherlandsUS

CanadaGermany

Switzerland Low

Development of buy-out market

DevelopedUn-

developedUKIreland

Netherlands

USCanada

GermanySwitzerland



6.3 Consistency of assumptionsDiscount ratesAs for the UK, companies use a range of discount rates to value their

pension liabilities in other countries. In the chart below, the horizontal bars

show the average discount rate for FTSE 100 companies with 31 December

year-ends for each location where this can be identified and how they

have moved since 2010 and 2009. The vertical lines show the extent of the

variation within each location in 2011.

8

7

6

5

4

3

2

1

0

201120102009

Disclosed discount rates for companies reporting at 31 December (% pa)


Dis

cou

nt

rate

(%

pa)


39 15 5 2 2 2 4

This analysis suggests that companies adopt a wider range of discount

rates in the US than in other locations.

It also shows that, in all countries, average discount rates fell during 2011.

The average discount rate across all locations decreased by around

0.6% pa which will have increased accounting liabilities by around 10%.

No

n-U

K s

chem

es

of

FTSE

10

0 c

om

pan

ies



Life expectancyFTSE 100 companies continue to adopt a wide range of life expectancy

assumptions in different countries, particularly in the UK and US, as shown

in the chart below. The horizontal bars show the average life expectancy

for a male at age 65 at the accounting date for different locations and how

they have moved since 2010 and 2009. The vertical lines show the extent

of the variation within each location in 2011.

This chart shows that FTSE 100 companies continue to assume that,

on average, pensioners in the UK will live for longer than pensioners

in most other countries. Over 2011 the gap to the UK increased for all

countries except Switzerland and the Netherlands. New tables have

recently been introduced in Switzerland which have resulted in companies

updating their assumptions in 2011.

If UK life expectancies were assumed for non-UK employees, non-UK

pension liabilities of FTSE 100 companies could increase by more than

£8 billion.

Lif

e ex

pec

tan

cy (

year

s)

92

90

88

86

84

82

80

201120102009

Disclosed life expectancies for a male at age 65 at the accounting date



64 21 4 6 4 4 3

3.2 yearsThe difference in average life

expectancy assumption for a

man at age 65 in the UK and

in the US.



The table below sets out the average life expectancy now and in

20 years’ time (where this has been disclosed) for a male at age 65

at the accounting date for FTSE 100 companies for different countries.

CountryNumber of

companies

Life expectancy

(current)

Life expectancy

(20 years’ time)

Additional life

expectancy

(years)

UK 54 87.4 89.5 2.1

US 17 84.2 85.0 0.8

Germany 6 83.6 85.8 2.2

Ireland 4 86.9 89.6 2.7

Canada 3 84.4 86.1 1.7

Netherlands 3 85.8 87.1 1.3

Switzerland 2 84.3 85.7 1.4

This shows that FTSE 100 companies currently allow for the greatest

level of future improvements in mortality in the UK, Germany and Ireland.

The smallest allowance is in respect of their pension schemes in the US

- indeed some FTSE 100 companies, including Bunzl, Compass, GKN,

National Grid, Smiths and Tate & Lyle, appear to be making no explicit

allowance for any future improvements in mortality for their US pension

schemes.

6.4 European Pensions DirectiveThe introduction of new “risk-free” reserving rules under the proposed

European Pension Directive would impact the cash funding and investment

strategies of most defined benefit schemes (and to a lesser extent defined

contribution schemes) in the EU. We would expect a significant increase

in the measure of liabilities for cash funding purposes and an increase in

interest for transferring pension liabilities to insurers.

FTSE 100 companies with defined benefit schemes in the EU should be

closely monitoring the position. In particular, in the UK, Ireland and the

Netherlands (the three main providers of defined benefit pension schemes

in the EU), funding reserves could increase dramatically.

As insurance companies will soon be complying with “risk-free” reserving

under Solvency II, countries like Sweden, where insurers are the main

providers of defined benefit pensions, will see less of an impact if the

proposals for pension scheme funding are subsequently introduced.

Thi

s ta

ble

sho

ws

the

key

dis

clo

sure

s m

ade

by

the

com

pan

ies

in t

he F

TS

E 1

00

as

at 3

1 D

ecem

ber

20

11 t

hat

rep

ort

ed IA

S19

fig

ures

in t

heir

20

11 a

cco

unts

. The

so

urce

of

the

dat

a is

each

co

mp

any’

s an

nual

rep

ort

and

acc

oun

ts f

or

the

acco

unti

ng p

erio

d e

ndin

g in

20

11. T

he m

arke

t va

lue

of

asse

ts a

nd s

urp

lus/

(defi

cit)

fig

ures

rel

ate

to t

he w

orl

dw

ide

po

siti

on

of

each

co

mp

any,

no

t ju

st t

he U

K s

chem

es. F

igur

es a

re s

how

n b

efo

re d

efer

red

tax

and

bef

ore

any

bal

ance

she

et a

sset

lim

its

have

bee

n ap

plie

d. A

ll fi

gur

es a

re r

oun

ded

to

the

near

est

mill

ion

po

und

s. T

he d

isco

unt

rate

and

pri

ce in

flat

ion

assu

mp

tio

ns r

efer

to

tho

se d

iscl

ose

d f

or

the

com

pan

ies’

mai

n U

K s

chem

es w

here

ava

ilab

le. “

ND

” m

eans

no

UK

spec

ific

fig

ures

wer

e d

iscl

ose

d.

2011

Surp

lus/

(defi

cit)

Co

mp

any

Year

-en

dM

arke

t va

lue

of

asse

ts

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

Ag

gre

koD

ec59

(6)

(6)

4.8

03.

40

5.50

Y

AM

EC

Dec

1,56

9(4

9)

(49

)4

.70

3.0

08

.10Y

Ang

lo A

mer

ican

Dec

1,679

(136

)(2

3)N

DN

DN

DN

Ass

oci

ated

Bri

tish

Fo

od

sS

ep2,

788

(36

)15

5.10

3.30

6.7

0Y

Ast

raZ

enec

aD

ec5,

516

(1,7

35)

(1,4

16)

4.8

03.

207.

50Y

Avi

va3

Dec

11,7

91

1,26

41,3

80

4.9

03.

105.

80

Y

BA

E S

yste

ms4

Dec

17,9

80

(4,2

01)

(4,0

06

)4

.80

2.9

07.

25N

Bar

clay

s5D

ec22

,74

8(7

5)8

84

.74

3.0

47.

70Y

BG

Gro

up5

Dec

829

(210

)(1

71)

5.0

03.

107.

30Y

BH

P B

illit

on

Jun

1,157

(110

)(5

1)5.

40

3.50

8.10

Y

BP

Dec

22,15

0(5

,814

)(2

,033

)4

.80

3.20

8.0

0Y

Bri

tish

Am

eric

an T

ob

acco

Dec

5,18

4(6

65)

(46

8)

4.7

03.

00

6.0

0Y

Bri

tish

Lan

d C

om

pan

y (T

he)

Mar

110

1111

5.50

3.70

8.4

0Y

BT

Gro

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ar37

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(1,8

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(1,7

60

)5.

503.

40

7.9

0Y

Bun

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ec27

2(7

4)

(60

)N

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DN

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up (

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(86

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Y

Car

niva

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00

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CR

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ec1,5

69

(533

)(4

98

)4

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3.0

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50Y

Dia

geo

Jun

6,0

35(8

24)

(64

3)5.

60

3.6

08

.30

Y

Evr

az5

Dec

306

(337

)(3

37)

ND

ND

ND

N

Exp

eria

nM

ar57

14

26

65.

60

3.50

ND

Y

Fre

snill

oD

ec19

(6)

(2)

ND

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N

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SD

ec1,5

39(3

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(28

6)

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DY

GK

ND

ec2,

69

3(8

68

)(4

65)

4.7

03.

00

7.8

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2010

Surp

lus/

(defi

cit)

Mar

ket

valu

e o

f as

sets

£m

Tota

l

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Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

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es

% p

a

Dis

clo

sed

m

ort

alit

y?2

53(3

)(3

)5.

303.

706

.60

Y

1,435

2727

5.4

03.

40

7.70

Y

1,74

8(6

9)

40

ND

ND

ND

N

2,6

90

(86

)(3

5)5.

203.

507.

10Y

5,0

36(1

,60

7)(1

,29

1)5.

503.

60

8.0

0Y

11,4

16(3

)12

75.

503.

507.

20Y

17,3

37(3

,125)

(2,9

59)

5.50

3.4

08

.25

N

18,9

05

(2,7

38)

(2,6

38)

5.31

3.50

8.4

0Y

824

(151

)(1

12)

5.50

3.50

7.70

Y

1,021

(14

2)(8

3)5.

503.

508

.30

Y

21,9

03

(2,9

00

)6

755.

503.

508

.00

Y

5,11

4(3

98

)(2

24)

5.4

03.

40

7.20

Y

98

33

5.50

3.9

08

.50

Y

35,4

29(7

,86

4)

(7,8

10)

5.50

3.6

08

.50

Y

258

(53)

(38

)N

DN

DN

DN

64

8(2

5)(2

5)5.

40

3.4

0se

e no

te 6

Y

203

77

5.50

3.50

ND

Y

4,3

35(2

39)

(20

6)

5.70

3.70

8.0

0Y

1,639

(39

0)

(216

)5.

00

3.10

7.20

Y

1,56

2(3

84

)(3

50)

5.30

3.4

07.

50Y

5,36

7(1

,20

2)(1

,00

8)

5.4

03.

308

.10Y

297

(29

3)(2

93)

ND

ND

ND

N

541

(49

)(2

5)5.

503.

70N

DY

21(4

)(0

)N

DN

DN

DN

1,40

0(3

02)

(26

1)5.

503.

50N

DY

2,6

60

(60

0)

(19

3)5.

40

3.35

7.8

0Y


Appendix 1: FTSE 100 accounting disclosure listing

70

2011

Surp

lus/

(defi

cit)

Co

mp

any

Year

-en

dM

arke

t va

lue

of

asse

ts

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

Gla

xoS

mit

hKlin

eD

ec12

,858

(1,4

76)

(1,0

98

)4

.80

3.0

08

.00

Y

Gle

nco

re In

tern

atio

nal5

Dec

183

(14

8)

(14

8)

ND

ND

ND

N

Ham

mer

son

Dec

52(3

1)(1

9)

4.7

03.

20N

DN

HS

BC

Ho

ldin

gs

Dec

22,5

04

(136

)25

54

.80

3.20

7.20

Y

ICA

PM

ar7

(1)

(1)

ND

ND

ND

N

IMI

Dec

1,19

6(1

89

)(1

25)

4.8

03.

107.

10Y

Imp

eria

l To

bac

co G

roup

Sep

2,8

76(7

54)

(67)

5.4

03.

207.

60

Y

Inte

rCo

ntin

enta

l Ho

tels

Gro

upD

ec4

45

(48

)21

4.7

03.

107.

40

Y

Inte

rnat

iona

l Air

lines

Gro

up5

Dec

16,2

63

(36

0)

(16

3)4

.85

2.9

5N

DN

Inte

rnat

iona

l Po

wer

Dec

766

(20

9)

(20

9)

4.8

03.

40

5.8

0Y

Inte

rtek

Gro

upD

ec9

7(1

1)(1

1)4

.90

ND

ND

Y

ITV

Dec

2,6

46

(39

0)

(351

)4

.70

3.0

07.

00

Y

John

son

Mat

they

Mar

1,137

(93)

(81)

5.50

3.50

8.10

Y

Kin

gfi

sher

Jan

1,64

5(5

8)

(58

)5.

60

3.50

8.5

0Y

Land

Sec

urit

ies

Gro

upM

ar15

19

95.

703.

707.

50Y

Leg

al &

Gen

eral

Gro

up3

Dec

1,40

7(2

88

)(2

88

)4

.70

2.8

06

.50

Y

Lloy

ds

Ban

king

Gro

up5

Dec

28,8

2859

259

25.

00

3.0

08

.30

Y

Man

Gro

up5

7M

ar25

022

225.

503.

507.

60

Y

Man

Gro

up5

7D

ec24

5(3

)(3

)4

.80

3.20

6.9

0Y

Mar

ks &

Sp

ence

r G

roup

Ap

r5,

398

182

183

5.50

3.4

08

.40

Y

Meg

git

tD

ec58

5(2

65)

(19

8)

4.7

03.

00

7.50

Y

Mo

rris

on

(Wm

) S

uper

mar

kets

Jan

2,30

438

385.

60

3.8

07.

45

Y

Nat

iona

l Gri

dM

ar18

,90

3(5

77)

(352

)5.

503.

50N

DY

Nex

tJa

n50

756

63

5.70

3.6

07.

70Y

Old

Mut

ual5

Dec

594

48

48

4.7

03.

305.

80

N

Pea

rso

nD

ec2,

157

(23)

14

.90

3.0

0N

DY

Pru

den

tial

3D

ec7,

051

1,431

1,431

4.7

02.

90

6.8

0Y

2010

Surp

lus/

(defi

cit)

Mar

ket

valu

e o

f as

sets

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

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rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

12,15

6(1

,223

)(8

77)

5.50

3.50

8.0

0Y

171

(99

)(9

9)

ND

ND

ND

N

51(2

6)

(15)

5.4

03.

50N

DN

19,18

8(1

,834

)(1

,48

4)

5.4

03.

708

.40

Y

8(1

)(1

)N

DN

DN

DN

1,116

(18

4)

(126

)5.

503.

507.

40

Y

2,9

60

(84

2)(6

2)5.

103.

107.

80

Y

387

(74

)(8

)5.

303.

508

.90

Y

15,2

79(8

25)

(577

)5.

503.

45

ND

N

336

(10

8)

(10

8)

5.30

3.6

07.

70Y

96

(6)

(6)

5.4

0N

DN

DY

2,4

33(3

13)

(276

)5.

40

3.4

07.

80

Y

1,04

5(2

02)

(18

9)

5.50

3.70

8.2

5Y

1,518

(19

8)

(19

8)

5.50

3.4

07.

90

Y

142

(7)

(7)

5.6

03.

80

7.50

Y

1,29

3(2

34)

(234

)5.

503.

40

6.5

0Y

26,3

82

(48

0)

(48

0)

5.50

3.4

08

.30

Y

258

55

5.50

3.70

7.9

0Y

4,9

49

(351

)(3

50)

5.50

3.6

08

.40

Y

568

(211

)(1

41)

5.4

03.

307.

70Y

2,11

1(1

7)(1

7)5.

65

3.6

07.

25Y

18,18

6(1

,412

)(1

,186

)5.

60

3.8

0N

DY

433

(50

)(4

3)5.

703.

60

7.70

Y

1,119

142

142

5.4

03.

707.

20N

1,98

2(4

8)

(28

)5.

503.

50N

DY

5,9

1322

122

15.

45

3.55

8.2

0Y



71

2011

Surp

lus/

(defi

cit)

Co

mp

any

Year

-en

dM

arke

t va

lue

of

asse

ts

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

Rec

kitt

Ben

ckis

er G

roup

Dec

1,112

(337

)(2

33)

4.8

03.

108

.10Y

Ree

d E

lsev

ier

Dec

3,6

34(2

42)

(87)

ND

ND

ND

N

Res

olu

tio

n Li

mit

edD

ec1,2

94

5252

4.9

0N

D5.

00

Y

Rex

amD

ec2,

811

(40

7)(3

21)

4.7

03.

106

.11Y

Rio

Tin

toD

ec8

,49

0(3

,023

)(2

,417

)4

.70

3.0

0N

DN

Ro

lls-R

oyce

Gro

upD

ec10

,016

1,251

1,74

64

.70

3.10

6.0

0N

Roy

al B

ank

Of

Sco

tlan

d G

roup

(T

he)

Dec

25,0

86

(2,0

51)

(1,8

88

)5.

00

3.0

07.

70Y

Roy

al D

utch

She

ll5D

ec4

1,36

4(4

,111)

(1,7

93)

ND

ND

ND

N

RS

A In

sura

nce

Gro

upD

ec5,

813

(135

)(6

7)4

.90

2.8

08

.00

Y

SA

BM

iller

Mar

239

(89

)28

ND

ND

ND

N

Sag

e G

roup

(T

he)

Sep

18(1

2)(1

2)N

DN

DN

DN

Sai

nsb

ury

(J)

Mar

4,6

14(3

40

)(3

31)

5.50

3.30

7.70

Y

Sch

rod

ers

Dec

764

5656

4.6

03.

40

6.8

0Y

Sco

ttis

h &

So

uthe

rn E

nerg

yM

ar2,

46

4(2

94

)(2

94

)5.

503.

507.

80

Y

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co G

roup

8D

ec1,7

47

(29

0)

(24

2)N

DN

DN

DN

Sev

ern

Tren

tM

ar1,4

73(2

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4)

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507.

85

Y

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ith

& N

ephe

wD

ec6

86

(16

1)(1

45)

4.9

03.

107.

20Y

Sm

iths

Gro

upJu

l3,

273

(175

)(1

07)

5.30

3.50

7.9

0Y

Sta

ndar

d C

hart

ered

Dec

1,36

3(3

01)

(20

5)4

.80

3.10

8.0

0Y

Sta

ndar

d L

ife

Dec

2,75

64

41

515

4.6

03.

15N

DY

Tate

& L

yle

Mar

1,24

5(4

1)1

5.50

3.6

08

.40

Y

Tesc

oF

eb5,

60

8(1

,356

)(1

,29

1)N

DN

DN

DY

Uni

leve

rD

ec13

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(2,11

9)

(1,0

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4.7

03.

00

7.30

Y

Uni

ted

Uti

litie

s G

roup

Mar

1,718

(19

5)(1

87)

5.50

3.35

ND

Y

Ved

anta

Res

our

ces

Mar

24(3

5)(3

5)N

DN

DN

DN

Vo

daf

one

Gro

upM

ar1,5

5810

70N

DN

DN

DY

Wei

r G

roup

(T

he)

Dec

60

6(8

5)(7

6)

4.8

03.

108

.10Y

2010

Surp

lus/

(defi

cit)

Mar

ket

valu

e o

f as

sets

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

1,054

(332

)(2

32)

5.4

03.

60

8.10

Y

3,50

7(1

70)

(24

)N

DN

DN

DN

1,113

66

66

5.51

ND

7.0

0Y

2,6

37(3

34)

(253

)5.

40

3.50

7.51

Y

8,4

80

(2,0

95)

(1,5

19)

5.4

03.

40

7.6

0N

8,2

1711

56

94

5.50

3.6

07.

50N

22,8

16(2

,183)

(2,0

22)

5.50

3.30

7.70

Y

40

,48

8(1

,655

)4

52N

DN

DN

DN

5,26

4(1

55)

(85)

5.50

3.10

8.0

0Y

226

(10

9)

3N

DN

DN

DN

15(1

1)(1

1)N

DN

DN

DN

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37(4

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(412

)5.

80

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08

.00

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69

334

345.

203.

708

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Y

2,29

8(4

64

)(4

64

)5.

503.

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.00

Y

1,533

(30

7)(2

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ND

ND

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55)

(34

7)5.

703.

60

8.0

0Y

616

(14

5)(1

31)

5.50

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7.4

0Y

3,0

43

(28

1)(2

15)

5.4

03.

208

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Y

1,377

(177

)(8

8)

5.50

3.50

8.0

0Y

2,22

821

627

85.

303.

35N

DY

1,172

(156

)(1

14)

5.50

3.70

8.10

Y

4,6

96

(1,8

40

)(1

,78

6)

ND

ND

ND

Y

13,7

64

(1,2

19)

(123

)5.

40

3.10

7.70

Y

1,911

(271

)(2

64

)5.

703.

30N

DY

22(2

4)

(24

)N

DN

DN

DN

1,48

7(2

03)

(138

)N

DN

DN

DY

595

(65)

(57)

5.4

03.

40

7.70

Y



72

No

tes:

1 W

e ha

ve li

sted

RP

I as

the

mea

sure

of

infl

atio

n an

d e

xclu

ded

CP

I whe

re it

co

uld

be

iden

tifi

ed in

the

acc

oun

ts.

2 T

his

colu

mn

ind

icat

es c

om

pan

ies

that

dis

clo

sed

suffi

cien

t in

form

atio

n to

cal

cula

te t

heir

ass

ump

tio

n fo

r lif

e ex

pec

tanc

y fo

r a

mal

e p

ensi

one

r in

the

UK

.

3 A

viva

, Leg

al &

Gen

eral

and

Pru

den

tial

sp

lit t

heir

pen

sio

n sc

hem

e su

rplu

s/(d

efici

t) b

etw

een

shar

eho

lder

and

wit

h-p

rofi

t fu

nds

and

ho

ld g

roup

insu

ranc

e p

olic

ies

in r

esp

ect

of

som

e o

f th

eir

ob

ligat

ions

.

W

e ha

ve in

clud

ed t

he IA

S19

val

ue o

f th

ese

po

licie

s in

the

fig

ures

sta

ted

ab

ove,

as

follo

ws:

Avi

va: £

0m

(20

10: £

1,44

5m),

Leg

al &

Gen

eral

: £58

3m (

2010

: £51

4m

), P

rud

enti

al: £

165m

(20

10: £

254

m).

4 T

he fi

gur

es f

or

BA

E S

yste

ms

excl

ude

£9

65m

of

its

2011

defi

cit

(£6

96

m in

20

10)

whi

ch is

allo

cate

d t

o e

qui

ty a

cco

unte

d in

vest

men

ts a

nd o

ther

par

tici

pat

ing

em

plo

yers

and

incl

ude

£4

03m

(£

261m

in 2

010

)

of

asse

ts h

eld

in t

rust

.

5 A

ll o

f th

e co

mp

anie

s ab

ove

acco

unte

d u

sing

imm

edia

te r

eco

gni

tio

n o

f g

ains

and

loss

es (

thro

ugh

“Oth

er C

om

pre

hens

ive

Inco

me”

), w

ith

the

exce

pti

on

of

Bar

clay

s, B

G G

roup

, Evr

az, G

lenc

ore

Inte

rnat

iona

l,

In

tern

atio

nal A

irlin

es G

roup

, Llo

yds

Ban

king

Gro

up, M

an G

roup

, Old

Mut

ual a

nd R

oyal

Dut

ch S

hell,

who

op

ted

to

sp

read

gai

ns a

nd lo

sses

und

er IA

S19

.

6 C

apit

a G

roup

dis

clo

sed

an

assu

mp

tio

n fo

r ex

pec

ted

ret

urn

on

equi

ties

/hed

ge

fund

s/ab

solu

te r

etur

ns o

f 6

.2%

pa

to 6

.7%

pa

as a

t it

s 20

11 a

cco

unti

ng d

ate

(20

10: 5

.5%

pa

to 7

.6%

pa)

.

7 M

an G

roup

cha

nged

its

acco

unti

ng y

ear-

end

fro

m M

arch

to

Dec

emb

er d

urin

g 2

011

. W

e ha

ve in

clud

ed d

etai

ls o

f b

oth

the

31

Mar

ch 2

011

and

31

Dec

emb

er 2

011

dis

clo

sure

s in

the

tab

le a

bov

e, b

ut h

ave

bas

ed a

ll o

f

the

anal

ysis

in t

his

rep

ort

on

Man

Gro

up’s

Mar

ch a

cco

unts

.

8 T

he fi

gur

es q

uote

d f

or

Ser

co G

roup

rel

ate

to t

he t

ota

l acr

oss

all

defi

ned

ben

efit

pen

sio

n sc

hem

es.

So

me

of

the

surp

lus/

(defi

cit)

rel

ates

to

co

ntra

cts

und

er w

hich

the

pen

sio

n co

sts

are

due

to

be

reim

bur

sed

.

The

20

11 fi

gur

es a

re a

s at

the

end

of

the

acco

unti

ng p

erio

ds

end

ing

in 2

011

. T

he 2

010

fig

ures

are

as

at t

he s

tart

of

the

acco

unti

ng p

erio

d.

All

fig

ures

sho

wn

abov

e w

ere

take

n fr

om

IAS

19 d

iscl

osu

res.

Fig

ures

hav

e

bee

n co

nver

ted

to

po

und

ste

rlin

g w

here

a c

om

pan

y ha

s re

po

rted

fig

ures

in it

s ac

coun

ts in

a d

iffer

ent

curr

ency

.

Trad

itio

nally

, so

me

com

pan

ies

wit

h ov

erse

as p

ensi

on

pla

ns d

o n

ot

fund

the

m v

ia a

n ex

tern

al s

chem

e, in

stea

d b

acki

ng t

he p

ensi

on

pla

n w

ith

com

pan

y as

sets

, whi

ch m

ay r

esul

t in

a la

rger

defi

cit

bei

ng d

iscl

ose

d.

Whe

re d

iscl

ose

d, t

he s

urp

lus/

(defi

cit)

att

rib

utab

le t

o f

und

ed s

chem

es is

als

o s

how

n ab

ove.

The

dis

coun

t ra

te a

nd in

flat

ion

assu

mp

tio

n re

fer

to t

hose

dis

clo

sed

fo

r th

e co

mp

anie

s’ m

ain

UK

sch

eme(

s). W

here

a c

om

pan

y ha

s d

iscl

ose

d a

ran

ge

of

assu

mp

tio

ns, w

e ha

ve t

aken

the

mid

-po

int.

Whe

re a

co

mp

any

op

erat

es p

ensi

on

sche

mes

in m

ore

tha

n o

ne c

oun

try,

we

have

co

nsid

ered

the

ass

ump

tio

ns u

sed

fo

r th

e U

K if

sep

arat

ely

giv

en. “

ND

” m

eans

no

UK

fig

ures

wer

e d

iscl

ose

d.

We

have

exc

lud

ed f

rom

our

sur

vey

the

follo

win

g 1

7 co

mp

anie

s w

ho h

ad n

o e

vid

ence

of

sig

nifi

cant

defi

ned

ben

efit

pro

visi

on:

Ad

mir

al G

roup

, Ant

ofa

gas

ta, A

RM

Ho

ldin

gs,

Ash

mo

re G

roup

, Bri

tish

Sky

Bro

adca

stin

g,

Bur

ber

ry G

roup

, Cai

rn E

nerg

y, C

apit

al S

hop

pin

g C

entr

es G

roup

, Ess

ar E

nerg

y, E

uras

ian

Nat

ural

Res

our

ces,

Har

gre

aves

Lan

sdo

wn,

Kaz

akhm

ys, P

etro

fac,

Po

lym

etal

Inte

rnat

iona

l, R

and

go

ld R

eso

urce

s,

Shi

re a

nd T

ullo

w O

il.

The

fo

llow

ing

thr

ee c

om

pan

ies

have

ent

ered

the

FT

SE

10

0 in

dex

sin

ce 3

1 D

ecem

ber

20

11 a

nd h

ence

are

no

t in

clud

ed in

our

sur

vey:

Ab

erd

een

Ass

et M

anag

emen

t, B

abco

ck In

tern

atio

nal a

nd C

rod

a In

tern

atio

nal.

The

follo

win

g t

hree

co

mp

anie

s ha

ve e

xite

d t

he F

TS

E 1

00

ind

ex s

ince

31

Dec

emb

er 2

011

: Cai

rn E

nerg

y, E

ssar

Ene

rgy

and

Man

Gro

up.

2011

Surp

lus/

(defi

cit)

Co

mp

any

Year

-en

dM

arke

t va

lue

of

asse

ts

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

Whi

tbre

adM

ar1,2

57(4

88

)(4

88

)5.

60

3.4

58

.20

Y

Wo

lsel

eyJu

l8

89

(36

0)

(28

3)5.

40

3.70

7.30

Y

WP

PD

ec6

54(2

81)

(133

)4

.70

ND

7.50

Y

Xst

rata

Dec

1,529

(44

5)(4

40

)N

DN

DN

DN

2010

Surp

lus/

(defi

cit)

Mar

ket

valu

e o

f as

sets

£m

Tota

l

£m

Fund

ed

sche

mes

£m

Dis

coun

t ra

te

% p

a

Infla

tion1

% p

a

Exp

ecte

d

retu

rn o

n eq

uiti

es

% p

a

Dis

clo

sed

m

ort

alit

y?2

1,28

1(4

34)

(434

)5.

60

3.50

8.2

0Y

724

(432

)(3

65)

5.4

03.

40

7.30

Y

631

(24

0)

(10

6)

5.4

0N

D7.

50Y

1,40

7(4

00

)(3

95)

ND

ND

ND

N



73

These tables show the key results of

analysis of the disclosures made by

the companies in the FTSE 100 as at

31 December 2011 that were reported

in their 2011 accounts.

The figures relate to the worldwide

position of each company (not just the

UK disclosure) but exclude healthcare

and defined contribution pension

arrangements, where possible.

The source of the data is each

company’s annual report and

accounts for the accounting period

ending in 2011.

The surplus/(deficit) figures are before

allowing for deferred tax and before

any balance sheet asset limit has

been applied.

Traditionally, some companies with

overseas pension schemes do not fund

them via an external scheme, instead

backing the pension scheme with

company assets, which may result in a

larger deficit being disclosed.

The source of market capitalisation

figures is the FTSE All-Share Index

Series reports as at the companies’

year-ends (where available).

All figures shown here have been

calculated using unrounded numbers.

Therefore, some metrics shown may

differ to those calculated using the

rounded figures.

Largest liabilities

Company2011

Liabilities £m2010

Liabilities £m

Royal Dutch Shell 45,475 42,143

BT Group 39,052 43,293

Lloyds Banking Group 28,236 26,862

BP 27,964 24,803

Royal Bank Of Scotland Group 27,137 24,999

BAE Systems1 23,146 21,158

Largest deficits

Company2011

Deficit £m2010

Deficit £m

BP 5,814 2,900

BAE Systems2 4,201 3,125


Rio Tinto 3,023 2,095

Unilever 2,119 1,219

Royal Bank Of Scotland Group 2,051 2,183

2 The figures for BAE Systems exclude £965m of its 2011 deficit (£696m in 2010) allocated to

equity accounted investments and other participating employers and include £403m (£261m

in 2010) of assets held in trust.

1 The figures for BAE Systems include all liabilities of the multi-employer plans that the

group participates in.

Largest liabilities compared to market capitalisation

Company Liabilities £m Market cap £m

2011Liabilities/

Market cap %

2010Liabilities/

Market cap %

International Airlines Group3 16,623 2,734 608 n/a

BT Group 39,052 14,352 272 452

BAE Systems1 23,146 9,249 250 188

Royal Bank Of Scotland Group 27,137 11,953 227 110

RSA Insurance Group 5,948 3,708 160 124

Lloyds Banking Group 28,236 17,634 160 60

3 As International Airlines Group formed during 2011 there is no corresponding value for 2010.


Appendix 2: FTSE 100 accounting risk measures


Appendix 2: FTSE 100 accounting risk measures74

Largest deficit compared to market capitalisation

Company Deficit £m Market cap £m

2011Deficit/

Market cap %

2010Deficit/

Market cap %

BAE Systems2 4,201 9,249 45 28

GKN 868 2,836 31 17

Royal Bank Of Scotland Group 2,051 11,953 17 10

Whitbread 488 3,131 16 17

ITV 390 2,650 15 11

Rexam 407 3,088 13 11

4 Prudential splits its pension scheme surplus/(deficit) between shareholder and with-profit funds and holds group insurance policies

in respect of some of its obligations. We have included the IAS19 value of these policies in the asset and liability figures stated above,

which was £165m for 2011 (2010: £254m).

Highest funding level

Company Assets £m Liabilities £m

2011Assets/

Liabilities %

2010Assets/

Liabilities %

Prudential4 7,051 5,620 125 104

Standard Life 2,756 2,315 119 111

Rolls-Royce Group 10,016 8,765 114 101

Next 507 451 112 90

Aviva 11,791 10,527 112 100

British Land Company 110 99 111 103

Lowest funding level

Company Assets £m Liabilities £m

2011Assets/

Liabilities %

2010Assets/

Liabilities %

Vedanta Resources 24 60 41 47

Evraz 306 643 48 50

Glencore International 183 331 55 63

Sage Group 18 30 60 57

Hammerson 52 82 63 66

Meggitt 585 850 69 73



Largest service cost5

Company2011

Service cost £m2010

Service cost £m

Royal Dutch Shell 727 686

BP 612 492

Tesco 528 391

Royal Bank of Scotland Group6 483 566

Lloyds Banking Group 400 430

Barclays 371 111

Largest employer contributions

Company2011

Contributions £m2010

Contributions £m

Barclays 2,220 728


BT Group 1,313 916

Royal Bank Of Scotland Group 1,059 832

BP 886 840

Lloyds Banking Group 833 648

5 The service cost (representing the value of benefits earned over the accounting period) includes the value of any past service benefits

awarded to members during the year.

6 Royal Bank of Scotland Group’s service cost includes £53m of expenses (2010: £55m).

Largest increase in employer contributions

Company

2011Employer

contributions£m

2010Employer

contributions£m

Increase inEmployer

contributions£m

Barclays 2,220 728 1,492

BT Group 1,313 916 397

Royal Bank Of Scotland Group 1,059 832 227

Lloyds Banking Group 833 648 185

Marks & Spencer Group 260 83 177

AstraZeneca 458 304 154



Largest employer contributions compared to service cost

CompanyContributions

£mService cost

£m

2011Contributions less service

cost £m

2010Contributions less service

cost £m

Barclays 2,220 371 1,849 616

BT Group 1,313 297 1,016 710

HSBC Holdings 727 1 726 1,768

Royal Dutch Shell 1,436 727 709 655

Royal Bank Of Scotland Group 1,059 483 576 266

GlaxoSmithKline 784 214 570 546

Highest equity allocation

Company

2011Equity allocation

%


%

BP 68 72

Bunzl 65 63

Wolseley 63 65

British Land Company 63 62

Vodafone Group 62 60

BG Group 60 76

7 International Airlines Group did not pay a dividend in 2011 but contributed £503m to its pension scheme in 2011.

8 ITV and Wolseley did not pay a dividend during their 2010 accounting years.

Highest employer contributions compared to dividends paid7

CompanyContributions

£mDividends

£m

2011Contributions /Dividends %

2010Contributions /Dividends %

Royal Bank Of Scotland Group 1,059 40 2,648 20

Lloyds Banking Group 833 50 1,666 1,379

ITV 59 16 369 see note 8

Serco Group 105 37 281 250

BT Group 1,313 543 242 346

Wolseley 90 42 214 see note 8



Lowest equity allocation

Company


%


%

Fresnillo 0 0

Prudential 5 10

Aviva 7 24

IMI 8 7

Rolls-Royce Group 11 18

G4S 12 19

Largest % increase in funding level

Company

2011Funding level

%

2010Funding level

%

Increase inFunding level

%

Accounting date

Next 112 90 22 Jan

Prudential 125 104 21 Dec

Experian 108 92 16 Mar

BT Group 95 82 13 Mar

Rolls-Royce Group 114 101 13 Dec

Centrica 108 95 13 Dec

Largest % decrease in funding level

Company

2011Funding level

%

2010Funding level

%

Decrease inFunding level

%

Accounting date

Capita Group 87 96 -9 Dec

BP 79 88 -9 Dec

Glencore International 55 63 -8 Dec

Fresnillo 76 83 -7 Dec

Standard Chartered 82 89 -7 Dec

Rio Tinto 74 80 -6 Dec



Notes

Highest gain on assets9

Company2011

Gain %2010

Gain %

Standard Life 23 18

Rolls-Royce Group 22 12

HSBC Holdings 18 15

Resolution Limited 17 10

Aviva 16 11

Barclays 14 13

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


Bob Scott

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Nick Bunch

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