On the go: More than four-fifths (84 per cent) of FTSE 350 companies’ defined benefit schemes are eligible to join a commercial consolidator, new research showed.
According to Hymans Robertson’s 2019 FTSE 350 DB pensions report, published on Thursday, these schemes have a funding level that enables access to consolidators, while also meeting the “gateway test”.
This requires schemes to be more than five years from full insurance buyout, meaning that commercial consolidation is a viable option under existing regulatory guidance.
However, while these superfunds are expected to be 5-10 per cent cheaper than full insurance buyout, it still requires a substantial cash injection, the report stated.
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, said: “Those corporates with schemes that pass the gateway test would have to pay on average 2.1 times the existing cash commitment all upfront to transfer the scheme to a commercial consolidator.
“This is a significant uplift to the existing cash commitments, meaning trustees should seriously consider a commercial consolidator offer if it is put on the table by their sponsoring employer.
“The offer needs to be considered even more seriously if there are concerns over the level of long-term covenant support.”
New rules on DB consolidation were absent from the latest Pension Schemes Bill, which has been put on hold due to the general election.
The current consolidators – The Pension Superfund and Clara Pensions – operate under the pensions regulatory regime, and do not technically need legislation to begin separating schemes from their sponsoring employers.
However, in the absence of dedicated regulations, employers are unlikely to hive off their schemes without clearance from the regulator assuring that they have adequately mitigated risks to members.
The consultancy firm’s report, which analysed 205 companies in the FTSE 350 with DB schemes, also concluded that these pension funds received £15bn from their sponsors during 2018-19, which compares with £19bn in the previous period.
Mr Russell-Smith added: “This past year has seen the largest year-on-year fall in aggregate contributions into DB schemes in the FTSE 350 over the past 10 years.
“We’re likely to be seeing this because schemes that have hedged are now starting to reach full funding on technical provisions, so some will be in a position to start turning off their deficit contributions.”
