FTSE 100 companies’ Defined Benefit pension risk falls by almost a quarter

October 2018
Worry Index 2018








  • Pension risk within FTSE 100 defined-benefit schemes has fallen to lowest level since Cardano and Lincoln commenced tracking in 2015
  • While there has been a significant fall in pension risk, one in eight FTSE 100 companies with DB obligations still remain vulnerable under a stress scenario 
  • While headline risk levels have improved year on year, pockets of risk remain in certain sectors; One in three consumer services companies with defined benefit liabilities are carrying high levels of risk 

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The latest Worry Index research from investment and covenant risk specialists, Cardano and Lincoln Pensions, has found that aggregate risk across FTSE 100 pension schemes reduced by almost a quarter (23.5%) since last year, reflecting positive investment returns, additional sponsor contributions and a relatively benign environment for the sponsor covenant.

The Worry Index, which seeks to provide a single measure of the overall safety (or not) of defined-benefit pension schemes, is now at the lowest level for the past four years. Indeed, the Worry Index has shown that since 2015, the DB pension risk within FTSE 100 schemes has reduced by 9.4 percent. Cardano and Lincoln Pensions started publicly publishing its Worry Index score in 2017 as part of efforts for greater transparency around the pensions risk underwritten by the corporate landscape. 

Despite the significant improvement in the pension risk position, one in eight FTSE 100 companies with defined benefit (DB) pension obligations (2017: one in five) is still in the ‘Worry Zone’1 and therefore still vulnerable, particularly in the event of a major economic shock such as that experienced in 2008.  However, under a stress scenario, the aggregate FTSE 100 pension deficit would still increase by an estimated £97bn, leaving some companies with a pension deficit bigger than the value of their sponsor2

Risks are particularly concentrated in the consumer services industry, driven by the retail sector, which has one of the highest Worry Scores of any FTSE industry (alongside capital-intensive industries such as telecoms, oil & gas, utilities and industrials). One in three retailers with DB liabilities is in the Worry Zone (DB pension deficit representing at least 30% of market capitalisation), prompting a wider analysis of the position of this market segment across the FTSE 350. 

Five of the 11 FTSE 350 retailers with DB obligations are running risks which threaten their ability to withstand stress scenarios, a finding which bears out the broader challenges currently facing the UK’s high street. In the past year, tougher trading conditions have claimed a number of high street stalwarts including Maplin and Toys ‘R’ Us with a number of others such as House of Fraser being rescued from administration through the injection of new capital; in many cases, the pension schemes of failed business are destined for the Pension Protection Fund (PPF).

The distribution of risk across the retail constituents is highly uneven, with risks concentrated in specific areas. The retailers with the highest Worry Scores in 2017 deteriorated in 2018, while those with the lowest Worry Scores (i.e. the most robust companies) drove year on year improvements in their Worry Score. Traditional supermarkets were overrepresented among the group with high Worry Scores, while early adopters of online channel, companies with well-differentiated brands and discounters, have low and improving Worry Scores. 

Many companies will have seen an improvement in their Worry Scores. They should use this opportunity to think ahead, prepare for potentially difficult times ahead, by reviewing their flight paths and contingency plans in the context of an IRM framework.

Cardano and Lincoln Pensions recommend taking the following action to safeguard your scheme:

  1. Understand all key risks, beginning with the sponsor covenant that has to stand behind all risks
  2. Set an objective – it can be helpful to focus on mid-term, rather than long term, objectives
  3. Determine an integrated strategy based on the covenant’s ability to support risk
  4. Set policies and implementing them, which acknowledge behavioural biases
  5. Agree and monitor the triggers which will require sponsor and investment strategy action

Kerrin Rosenberg, Chief Executive of Cardano, said:

“It is encouraging to see such a significant reduction in the level of risk being carried by FTSE 100 pension schemes. At this late stage in the economic cycle and against a backdrop of ongoing Brexit uncertainty, the balance of risks for pensions schemes are increasingly to the downside so to look forward from an improved position of strength is very encouraging. 

“We hope that those trustees that have seen their position improve use this opportunity to make sure they are prepared and in a resilient place to weather the next downturn.”

Darren Redmayne, Chief Executive of Lincoln Pensions, said:

“The Worry Index is indicative of overall health and it is great to see the score improving this year.  As with all high-level metrics there is much going on under the surface with some improved scores driven by improved market valuations of sponsors rather than better underlying performance of those companies.  The retail sector, perhaps unsurprisingly, has more concerning Worry Index scores.

As an industry we must get ever more sophisticated in our assessment of risk. There is still too much focus on deficit figures – but this is just one measure of underlying risk.  A large deficit may be tolerable if there is a robust covenant standing behind it: a pension is only as good as the company or entity supporting the risk.”

1 Where their pension deficit would total 30 per cent or more of the value of the company.

2 At least 2 companies could find themselves with a pension deficit bigger than the total value of their sponsoring company (2017: 4 companies)



About The Worry Index

Stress tests are crucial to gauging institutions’ and companies’ ability to withstand risk through a market shock. In this report Cardano and Lincoln Pensions have applied a similar methodology to assess the ability of FTSE 100 constituents and FTSE 350 retailers to meet their DB pension obligations if economic conditions deteriorate, by using the Pension Protection Fund Guidance for Bespoke Stress Calculation for Assessing Investment Risk3

The Worry Index captures in an integrated measure of the three major risks facing a defined benefit (“DB”) pension scheme – funding risk, investment risk, and sponsor risk – the three fundamental risks highlighted by Integrated Risk Management (IRM) guidance of the Pensions Regulator.

It covers the 77 FTSE 100 companies with a defined benefit pension scheme, based on their latest financial year ending on or before 31 March 2018. 

For each company, we divided the size of the pension deficit by the total value of the company. This gave us a Worry Score for each company, which we then averaged into the Index. We modelled the Index under current market conditions, but also under stress conditions, which are laid out by the Pension Protection Fund.

The Pension Protection Fund Guidance for Bespoke Stress Calculation for Assessing Investment Risk assesses a stress scenario to be as follows:

  • the stocks that pension schemes invest in are likely to perform poorly, as businesses struggle to grow the revenues required to support share prices; investment grade bonds are likely to increase in value as investors retreat to safer assets
  • to stimulate economic growth, the Bank of England is likely to keep interest rates low (or even negative), pushing up the value of pension scheme liabilities; the economy might experience higher inflation as a result of monetary policies and/or weak currency

For each company, scheme liability and asset data were sourced from company annual reports. Sponsor data, such as market capitalisation and enterprise value, was sourced from Bloomberg.

For more information on how The Worry Index was calculated, download the methodology here. 

3 The stress scenario followed the Pension Protection Fund Guidance for Bespoke Stress Calculation for Assessing Investment Risk https://www.pensionprotectionfund.org.uk/DocumentLibrary/Documents/1617_investment_risk_appendix.pdf