FTSE 350 DB pension schemes are now beating pre-Covid expectations, with the rebound in financial markets reducing the average time to buyout to around 7 years and 5 months
Figures from Barnett Waddingham show the aggregate buyout deficit of FTSE350 DB schemes stood at £130bn at the end of May, a reduction of £80bn since a year earlier.
Deficit contribution levels fell by around £1.6bn in 2020, excluding a one-off £1bn paid by BAE systems, but less than a third of this was a result of Covid-19 deferrals. The slight fall in deficit contribution levels suggests the impact of Covid-19 on overall contribution levels was limited.
Less than a third of this £1.6bn reduction was a result of Covid-19 deferrals, with the main reason for contribution reductions being changes to recovery plans as scheme funding levels improved in the period prior to the pandemic.
By the end of May 2021, equity markets were up by over 20 per cent compared to the same point last year, with the news of the vaccine in November providing the key turning point. Over the same period, index-linked bond yields were up by around 25 basis points, reducing the value of DB scheme liabilities.
means that the FTSE350 DB schemes’ journey to the endgame is now firmly back on course. At the end of December 2019, the average time to buyout for the FTSE350 DB schemes was around 9 years and 3 months. Despite the significant volatility over the year, the chart shows that the FTSE350 DB schemes are now ahead of the expectations prior to the economic disruption of Covid-19, with the average time to buyout standing at around 7 years and 5 months at the end of May 2021.
Barnett Waddingham says that assuming the deficit contributions paid over 2020 continue, around 61 per cent of the FTSE350 DB schemes can expect to be in a position to buyout within 10 years.
Barnett Waddingham partner Simon Taylor says: “The Covid-19 crisis caused severe disruption across the world economy, and the UK’s pension landscape was no exception. However, it seems that the worst has passed, and the winds of change are blowing in a more optimistic direction. 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. Being clear what a scheme’s objective is and agreeing a plan with clear risk parameters helps to put significant financial market changes into context. Having a clear decision-making framework also allows action to be taken quickly where necessary, and to capitalise on any opportunities that might arise. The material improvement in funding positions over the last few months is a good example of how journey plans can add significant value. A robust real-time monitoring framework will have identified this step change in funding levels, allowing companies and trustees to take action to reduce risk and lock in the positive investment returns experienced over recent months.”
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