Aggregate FTSE 350 deficit dropped to £39bn in 2018 – Barnett Waddingham

The total defined benefit pension deficit for FTSE 350 companies dropped to £39bn during 2018, according to Barnett Waddingham.

This was down by 29 per cent on 2017 figures, when the deficit stood at £55bn. Barnett Waddingham said this was down to an increase in corporate bond yields and the continuing payment of deficit contributions.

Consumer and energy companies saw the biggest falls, which fell by a combined £10bn. The deficit among energy companies fell 43 per cent to £6.9bn, while the total deficit among consumer staples fell by 52 per cent to £4.4bn.

As the total DB pension positions improve, an increasing number of companies have a DB pension scheme with an accounting surplus, raising the prospect of a buyout with an insurance company and removing the risk from their balance sheets. Forty-six per cent of FTSE 350 companies now have a pension scheme funding surplus on an accounting basis, Barnett Waddingham said. This has doubled from 23 per cent just five years ago.

However, the proportion of DB schemes with a surplus varies considerably by sector. Sixty-nine per cent of companies in the financial sector have a surplus on their DB scheme as do 57 per cent of utilities firms. By contrast, just 14 per cent of IT firms’ schemes are in the same position.

Barnett Waddingham noted that with more schemes improving their funding levels, more schemes are approaching their end game. One in twenty FTSE 350 companies will be in a position to buyout their DB schemes in the next two years. Twenty-one per cent will be able to do so in the next five years, and over half will be able to do so in the next decade.

Furthermore, one in five FTSE 350 companies could now afford to buyout their DB scheme using less than 10 per cent of the cash sitting on their balance sheet.

Increasing bond yields and improving asset prices have helped improve DB scheme funding positions. However, slowing mortality rate improvements have also had a significant impact. The latest mortality projections have reduced the average time to reach buyout by one year, when compared to life expectancy estimates five years ago. A further one-year fall in life expectancies over the next five years would mean that two-thirds of FTSE 350 schemes would be able to buyout by 2028, rather than the 54 per cent currently projected.

Commenting, Barnett Waddingham head of corporate consulting and partner, Nick Griggs, said: “With improving funding levels, maturing pension schemes and a significant amount of de-risking already achieved, company boards should be focusing on how they navigate the remaining part of the journey to the endgame.”

“DB scheme liabilities have long weighed on company balance sheets and, despite the measures taken to limit their cost, they remain a far greater drain on resources than their DC counterparts. DB schemes still account for two-thirds of FTSE 350 company spending on pensions.

“Now is the time to take action and set a new approach. As a growing number of companies can see the light at the end of the DB pension scheme tunnel, it is vital they proactively put in place a strategy targeted at reaching the scheme’s endgame. Many could soon be in a position to write the cheque which will make the aspiration of an insurance buyout a reality.”

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