More than six in 10 FTSE 350 defined benefit scheme sponsors have reported a pensions accounting surplus as at the end of 2021, while the aggregate surplus has almost doubled in the past months.
According to Willis Towers Watson’s analysis of company accounts in its FTSE 350 DB pension scheme report 2022, 62 per cent of sponsors with a December 31 year-end had a surplus, up from 34 per cent in the previous year.
Meanwhile, 94 per cent saw their pension funding level improve during the year.
A combination of improvements in asset markets in 2021, higher yields pushing up discount rates, and slightly reduced life expectancy assumptions have all helped to boost funding positions.
Companies and trustees will need to negotiate whether the journey plan must involve further cash injections or whether it can rely on investment performance
Charles Rodgers, Willis Towers Watson
Improving funding levels
The aggregate deficit for 89 FTSE sponsors fell from £1bn at the end of 2020 to a £32bn surplus at the end of 2021, while the funding level rose from 99 per cent to 106 per cent.
The actuarial consultancy’s analysis of market movements suggests that the aggregate position moved into surplus on January 5 2021 and estimates that it rose to £58bn by May 19 2022.
Higher credit spreads have pushed down pension liabilities in company accounts.
Charles Rodgers, head of global pension accounting at WTW, said schemes with large holdings of either equities or gilts “will have seen these assets outperform corporate bond-based liability measures”.
He added that even for those sponsors still paying deficit contributions, many of their schemes are well-funded and caps on inflation-linked pension increases could deliver a further improvement this year.
Now that more schemes are in surplus or have improved their funding positions, the trustees and sponsors can focus on their long-term objectives such as buy-ins and buyouts.
“As these schemes focus on reaching their long-term objectives, such as buying out benefits with an insurance company, companies and trustees will need to negotiate whether the journey plan must involve further cash injections or whether it can rely on investment performance in the first instance,” Rodgers said.
Deficit contributions and dividends
Around three-quarters of FTSE 350 sponsors in the analysis are estimated to have paid deficit contributions in 2021, which barely changed from 2020.
More than eight in 10 companies paid more in dividends than deficit contributions, while the proportion of companies where deficit payments were at least equal to dividends dropped 19 per cent in 2021 from 43 per cent in the previous year.
Rodgers said: “Deficit contributions held up well at the height of the pandemic, with far fewer companies negotiating changes than had been feared. The change in the dividend-to-deficit payment ratio reflects dividends being switched back on rather than pension contributions being switched off, though improving funding levels may also affect these numbers in future.”
More schemes are closing, while life expectancy falls
More schemes are closing to future accrual, with just 35 per cent of companies saying that some employees continued to accrue DB pensions, down from 39 per cent in the previous year.
However, Rodgers said the industry may be reaching a point where this trend slows because it may be difficult to close some schemes due to their particular circumstances with ongoing accrual, while rising yields could reduce accrual costs.
“The cost of living crisis may also stiffen opposition to closure from unions and affected employees, though some employers could argue that controlling pension spending could help make pay rises affordable for the wider workforce,” he added.
At the same time, life expectancy has fallen by about a year for men and 17 months for women, after it peaked in 2014, which WTW said reduces liabilities by around 3 or 4 per cent.
Water Companies scheme trustee stands firm over surplus transfer
David Sankey, chair of the £710mn Water Companies Pension Scheme, has assured MPs that the trustee has fulfilled its duties with respect to the planned transfer of the Bristol Water section’s surplus to its sponsor.
Companies on average assumed that male members aged 65 in 2021 would die aged 87 years, and women at 88.6 years, while life expectancies for current 65-year-olds are lower than at any point in the past decade, according to the report.
Interestingly, the pandemic has had little impact on these assumptions so far. The report said the deeper question is whether the aftermath of Covid-19 will lead to more long-term changes to longevity.
“Will the longer-term effects of the coronavirus or the backlog of untreated illnesses facing the NHS lead to further reductions in longevity? Or will changes to hygiene practices and the advent of new mRNA technologies bring society back on to the upward path of rising life expectancy?” it asked.
