Pandemic could cut FTSE 100 DB contributions by £5bn

DB liabilities could fall by 1 to 2 per cent in the medium to long term, according to LCP. For FTSE 100 schemes, this may translate into an annual reduction in contributions of £1bn for those whose schemes are in deficit.

The consultancy suggested that this trend would add up to aggregate savings of around £5bn. It expects many sponsors to pursue an insurance solution for their schemes.

LCP’s findings were supported by Barnett Waddingham research in February, which highlighted pandemic-driven uncertainty over life expectancies over the next five to 10 years.

While vaccines appear to have cut the number of deaths directly caused by the virus, Barnett Waddingham said a surge in coronavirus-linked deaths as restrictions are lifted and an increase in related long-term illnesses are some examples of the pandemic suppressing life expectancies.

It added that this could have an impact on bulk annuity pricing.

LCP’s latest study also revealed that the schemes of around half of FTSE 100 companies may now be fully funded using “low-reliance” assumptions. 

It said this methodology would sit in line with imminent, longer-term funding requirements expected from the Pensions Regulator later this year.

The Pensions Scheme Act 2021 will force trustees to devise scheme-specific funding and investment strategies, known as the ‘long-term objective’. Copies of the statement must be sent to the watchdog.

LCP said that there was a combined accounting surplus of £60bn for FTSE 100 companies’ schemes at the start of 2022.

This adds to mounting evidence that schemes sit in rude health. The health of UK DB pension schemes hit a record high at the end of last year, according to Legal & General Investment Management. 

The average DB scheme could expect to fund 98.4 per cent of accrued pension benefits as of December 31 2021.

Earlier this week, banknotes manufacturer De La Rue announced that it had agreed a new schedule with its pension scheme, which will allow it to keep its deficit repair contributions at £15mn a year until March 2029, saving it £57mn in cash payments.

The scheme’s latest actuarial valuation had revealed a reduced funding deficit of £119.5mn, compared with a previously agreed total contributions schedule of £177mn from April 2021 to March 2029.

“There is room for optimism, with many of the UK’s largest schemes now fully funded using low-reliance assumptions, even before allowance is made for the potential impact of the pandemic on future life expectancy trends,” said LCP partner Steven Taylor.

“While this all appears good news for sponsors, these developments come with a fresh set of challenges and uncertainties, including the impact of the Pension Schemes Act 2021 and the new funding regulations,” he added. 

“For some sponsors we predict this will enhance the business case for an insurance solution for their scheme.”