This deficit, calculated using data from mid-July, is the largest shortfall ever recorded under the IAS19 accounting standard used for pension schemes, and is more than double the £41 billion deficit estimated a year ago.
LCP added that new International Accounting Standards Board proposals to include pension-related losses and gains on company income statements would have cut total 2008 profits for the FTSE 100 from £46 billion to £13 billion if they had been in force last year.
Bob Scott, a partner at LCP, said: "The collapse of Lehman Brothers in September 2008 had a significant impact on the UK pension schemes of FTSE 100 companies. Asset values fell sharply yet, paradoxically, the effect did not show up immediately in company accounts as corporate bond yields rose and inflation expectations fell. However, since March this year, deficits have ballooned as aggressive cuts in interest rates and quantitative easing have caused these factors to reverse."
The findings follow warnings from the UK Pensions Regulator, which in February told companies to act towards repairing deficits and cautioned that they should not continue paying shareholder dividends at the expense of their pension schemes.
But despite these, the LCP survey found many companies are in danger of overlooking their pension risks. It noted that only 46 FTSE 100 companies identify pensions as a key risk to their business, and only 17 set out a policy in their report and accounts for dealing with pension risk.
LCP also criticised the IAS19 accounting standard, which requires companies to value liabilities using corporate bond yields. It claims that not only do the IAS19 numbers diverge from trustee funding numbers, but the wide range of corporate bond yields means pension accounting numbers might not give a consistent comparison for two companies reporting at the same time.
The consultancy predicts the £96 billion deficit will lead to major cutbacks in the defined benefit schemes of FTSE 100 companies and to a greater number of longevity hedge deals as the life expectancies of pension scheme members increase. The first deal of this kind involving a UK pension scheme took place earlier this year as Babcock International transferred longevity risk for pensioners to the capital markets.
"Looking ahead, the outlook for the economy and financial markets remains unclear, creating further uncertainty for pension scheme finances," Scott commented. "Those companies that work with their pension scheme trustees to identify and reduce pensions risk will be better placed to weather any future financial storms than those that fail to act."
The problem is not restricted to the FTSE 100: according to the UK Pensions Protection Fund, the overall deficit across 7,400 UK defined-benefit pension funds worsened to £200.1 billion at the end of June, from £179.3 billion at the end of May.
The week on Risk.net, July 14–20, 2017Receive this by email