On the go: The majority of defined benefit schemes from FTSE 350 companies are back on track in terms of their funding goals, after being hit in 2020 by the economic crisis caused by Covid-19, according to research from Barnett Waddingham.
The consultancy analysis of year-end accounting information disclosed by FTSE 350 companies with a DB pension scheme found that deficit contribution levels fell slightly over 2020 – by around 7 per cent in aggregate – suggesting the pandemic impact on contribution levels was limited.
However, the data is slightly skewed by the large one-off £1bn contribution paid by BAE Systems over the period, Barnett Waddingham stated.
Once this is excluded from the analysis, overall deficit contributions fell by around £1.6bn over the year – a fall of around 18 per cent in aggregate – indicating a more substantial impact.
The decrease might be due to action from the Pensions Regulator, which in March 2020 launched new guidance aimed at helping employers freeze their DB obligations for three months in response to the economic fallout from coronavirus.
In terms of solvency, the consultancy’s analysis showed that FTSE 350 DB schemes benefited from the resurgence in financial markets, since by the end of May equity markets were up by more than 20 per cent compared with the previous year, while index-linked bond yields increased by around 25 basis points, reducing the value of DB liabilities.
The impact of these financial market changes means that the aggregate buyout deficit of these schemes now stands at £130bn, a reduction of £80bn since the end of May 2020, Barnett Waddingham stated.
The consultancy noted that the strong recovery in financial markets means that the schemes’ journey to the endgame is now firmly back on course.
At the end of December 2019, the average time to buyout for the FTSE 350 pension funds was around nine years and three months. At the end of May, this figure had decreased to seven years and five months.
Assuming the deficit contributions paid over 2020 continue, Barnett Waddingham predicts that around 61 per cent of the FTSE 350 DB schemes can expect to be in a position to buyout within 10 years.
Simon Taylor, partner at Barnett Waddingham, noted that despite the Covid-19 crisis causing severe disruption across the world economy, “it seems that the worst has passed”.
He said: “C-suites and trustee boards alike will be breathing a sigh of relief that the Covid-19 funding gap appears to have been resolved without the need for a significant cash outlay.
“But we must not rest on our laurels. There will undoubtedly be more challenging times ahead for DB schemes.
“If the past year and a half has proved anything, it is that a journey plan is the strongest tool in any strategic leader’s arsenal, and that is especially true for those managing a DB scheme.”
