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Impending accounting standards changes to IFRIC 14 rules and increased pressure on companies to accelerate contributions could worsen FTSE 100 balance sheets by up to £100 billion, LCP has warned.
According to the latest edition of LCP’s Accounting for Pensions report, accounting standards change is due to hit FTSE 100 pension schemes by up to £100 billion, with more than a quarter being hit to the tune of £1 billion.
With the Pensions Regulator pushing employers to "mend the roof while the sun’s shining", the ability to pay dividends or raise capital may be at risk for some and we could see increased regulatory capital requirements in the financial sector.
The report shows that FTSE 100 companies are paying around £90 billion in dividends, seven times more than the £13 billion paid to pension schemes. Furthermore, it reveals that FTSE 100 companies on average provided their CEOs with pension contributions worth 25 per cent of basic pay in 2018, despite pressure to bring executive pensions into greater alignment with those of the wider workforce
LCP predicted that this could change following the 2018 amendments to the Corporate Governance Code and announcements by the Investment Association, which stated that executive pension contributions should be aligned with the majority of the workforce.
Currently only 15 per cent of the FTSE 100 pay pension contributions or cash to their CEO in line with the rates paid to their workforce.
"The FTSE 100 and the wider pensions industry will also have been relieved that the financial impact of GMP equalisation was significantly less than previously predicted. Despite this, it seems as if FTSE 100 balance sheets aren’t out of the woods just yet," said Phil Cuddeford, LCP partner and lead author of the report.
"With the regulator focusing on risk management and longer-term thinking, companies should be proactive in implementing long-term strategies if they are to meet the incoming regulatory requirements in the updated DB funding code, due to be consulted on later this year.”
The LCP's report also acknowledges the current spotlight on the audit market.
It suggests that a complete overhaul of the audit sector is likely, with a new independent regulator, the Audit, Reporting and Governance Authority (ARGA). In addition, the Competition and Markets Authority (CMA) has proposed tough new measures.
"Together, these could bring more focus on how pension figures are audited and on an auditor’s role in cases where companies have become insolvent," LCP has warned.