On the go: FTSE 350 defined benefit schemes could be reaching their endgame quicker than expected due to the effects of the pandemic on life expectancy, new research has shown.
According to Barnett Waddingham, the average time to endgame for these schemes currently stands at around seven years and five months, after their aggregate buyout deficit dropped by £80bn since May 2020, to a total of £130bn in May 2021, due to the economic circumstances of Covid-19.
However, these schemes could reach buyout as soon as March 2026, rather than the current estimate of October 2028, due to the impact of the pandemic on schemes’ liabilities.
The consultant stated that life expectancy is expected to be negatively affected by the pandemic, “including Covid-19 itself, broader missed medical diagnoses, a volatile flu season, and the impact of austerity”.
In the most negative modelled scenario of life expectancy, Barnett Waddingham predicts that within 12 months, the average time to buyout could fall by 35 per cent to four years 10 months.
In the most positive scenario, where life expectancy increases significantly following the pandemic and there are no negative consequences, the time to buyout would be pushed up to eight years 3 months, a 10-month increase to August 2029.
The strong recovery in financial markets means FTSE 350 DB schemes’ journey to endgame is now firmly back on course since the pandemic began, the consultancy noted.
And if the negative scenario for life expectancy plays out, the insurance market will need to adjust its pricing accordingly, bringing the endgame even closer, it added.
Simon Bramwell, principal and head of longevity risk transactions at Barnett Waddingham, noted that the Covid-19 crisis “caused severe disruption across the world economy, and the UK’s pension landscape was no exception”.
He said: “It seems that the worst is now behind us, and on a financial basis the Covid-19 funding gap appears to have been resolved — most schemes are in a better position than they were before the crisis.
“Despite record volumes of pension derisking activity in the last few years, with more than £100bn of UK DB pension scheme liabilities being transferred over 2019 and 2020, there remains a substantial amount of DB pension scheme risk on FTSE 350 company balance sheets.”
“It now falls to schemes to derisk accordingly and keep on a clear path to their endgame”, he concluded.
