FTSE 100 companies pay around five times as much in dividends as they do in contributions to their defined benefit pension schemes, according to the LCP's annual study of pensions.
The LCP report analyses how FTSE 100 companies are managing their pension risks, and it found the combined pension deficit of the 56 companies in the FTSE 100 that disclosed a deficit at their 2015 year-end was £42 billion.
Those same companies paid £53 billion worth of dividends, which is some 25 per cent higher than their pension deficits.
A GROWING GAP
Bob Scott, LCP's senior partner and report author, says: 'The collapse of BHS and the potential sale of Tata Steel UK, both with underfunded pension schemes, have highlighted the significance of pension liabilities and the impact that a large defined benefit scheme can have on a UK company.'
The report also found that FTSE 100 companies put £13.3 billion into defined benefit (DB) pensions compared with only £6 billion into defined contribution (DC) pensions, and the report adds that this gap has grown in recent years.
'The increasing cost of DB pension provision has meant that more contributions went towards additional pension accrual than in any year since 2009,' says Scott.
'This is despite the significant number of DB scheme closures, and a material reduction in the number of employees accruing DB pensions.
'Not only is this a drag on company performance and the wider UK economy, but the relatively small contributions going into DC may be storing up problems for the beneficiaries of those schemes when they come to retire.'
One way of cutting pension scheme deficits is by reducing the level of increases that schemes are obliged to provide, concludes the report.
According to Richard Parkin, head of pensions at Fidelity International, the recent spike in deficits has been driven by gilt yields falling sharply. He points out: 'The 15-year yield has fallen from 2.25 per cent last year to just under 1 per cent today.'
While this may seem like a small fall, compounded over the long term it has the effect of significantly increasing liabilities, adds Parkin.
STRIKING A BALANCE
Andrew Pennie, head of pathways at Intelligent Pensions, says for FTSE 100 companies a balance needs to be struck between funding pension costs, making profits and satisfying and attracting shareholders.
Otherwise, Pennie adds, 'the sad fact is we are highly likely to see a lot of scheme closures in the coming months and years unless the cost of funding defined benefit pensions can be made more affordable'.
Claire Trott, director and head of Pensions Technical at Talbot and Muir, says the widening gap between defined benefit schemes and defined contribution schemes is something that isn't going to go away anytime soon.
'Those schemes in deficit may already be struggling to build the funds back up to a suitable funding level and the impact of Brexit will have exacerbated it,' says Trott.
Defined benefit schemes have been seen in the past as a gold standard pension and those with an employer offering them were seen to be the lucky ones, adds Trott.
She says the impact of the funding requirements may not make it so appealing these days because of the strain it could put on the company.
'This isn't an issue for those with defined contribution schemes because the contribution amount will be known and won't suddenly need to increase.'
She concludes those schemes that are still open may need to consider closing which will mean curbing benefits but will also mean that there will be no additional member contributions being received.
The impact on a company with an underfunded defined benefit scheme could be catastrophic if the situation continues to get worse and even more funding is required.