UK pensions trends: FTSE 100 defined benefit pension schemes are increasingly bolstered by bonds

Hayley Kirton
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FTSE 100 companies now hold a record £315bn worth of bonds across their defined benefit (DB) pension pots, research released today has found.

According to the study by JLT Employee Benefits, FTSE 100 companies increased the value of bonds they held in their DB pension scheme assets by roughly £25bn over the year to the end of September 2015.

On average, bonds now account for 59 per cent of the assets in the average pension scheme, up from 56 per cent at the end of September 2014 and up from 49 per cent six years ago.

"The level of schemes' bond holdings has reached a record high, which is good news in terms of lowered investment risks," said Charles Cowling, director at JLT Employee Benefits. "It could also reflect greater prudence in trustees' approach to risk management generally, which is very positive particularly as large deficits could tempt pension schemes to invest in higher growth, higher risk investments to make up for the shortfall."

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Direct Line Insurance led the way as the company with the largest proportion of its pension dedicated to bonds, as bonds make up 96 per cent of the assets of its £83m pot. The insurer was shortly followed by Rolls-Royce, which holds 92 per cent of its assets as bonds, and Fresnillo, which holds 89 per cent of its assets as bonds.

Which company in the FTSE 100 holds the largest proportion of bonds in its DB pension pot?

1. Direct Line Insurance: 96%

2. Rolls-Royce: 92%

3. Fresnillo: 89%

4. Prudential: 88%

5. InterContinental Hotels: 87%

However, an increase in the proportion of bonds held has not necessarily equated to an increase in the cover of liabilities. JLT Employee Benefits also found that, in the year to September 2015, the total pension deficit across the FTSE 100 crept up £7bn to £73bn, while the total disclosed pension liabilities also went up from £591bn to £614bn.

Research published last December by JLT Employee Benefits discovered that DB pensions had fallen out of favour with FTSE 100 companies, as just 23 were incurring DB service costs at a level that would suggest that a significant number of staff were benefiting from the scheme in the year to June 2015.

Cowling added: "While it is encouraging to see heightened cautiousness among pension schemes, greater bond holdings will likely put more pressure on companies to fund pension scheme deficits through cash contributions."

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