Average time to DB pension buyout hits all-time low

The average time for FTSE 350 pension schemes to buyout their DB liabilities has fallen to a historic low, Barnett Waddingham’s DB End Gauge Index has revealed.

Over the month to 31 May 2022, the average time to buyout for the FTSE 350 DB pension schemes fell by one year and four months to 8.3 years, according to the index.

This is the lowest recorded figure since Barnett Waddingham launched its monthly End Gauge analysis in December 2020 and follows the previous record low seen at the end of April 2022.

This fall in May has accelerated the downward trend witnessed over the previous two months as, in total, the index has fallen by over two tears since the end of February 2022.

The decrease in the index was, according to Barnett Waddingham, mainly driven by an increase in gilt and swap yields, which reduced overall liability values.

A volatile month for financial markets also saw growth assets settle at a similar level to the start of the month.

Barnett Waddingham partner, Simon Taylor, commented: “Inflation fears and the corresponding monetary tightening by central banks has sent long-term bond yields to a level not seen for around a decade. The impact on pension scheme funding levels has been astonishing, with most schemes seeing a marked improvement despite growth market volatility and increased inflation expectations.

“On top of this, there has been a widening in credit spreads over the last few weeks which has made bulk annuity pricing significantly more attractive. The upshot of this is an array of opportunities for companies to reduce risk and lock in some of the gains from recent months.

“A robust monitoring process will allow companies to capture these opportunities as soon as they arise, providing a solid foundation to control risk along the journey to the scheme’s endgame.

“The significant improvement in funding positions should also be focusing attention on buyout readiness. It’s not enough to simply achieve the required funding position – reviewing the scheme’s data and legal documentation is a fundamental component of the journey plan, as is considering the potential impact of member options. Companies will want to ensure that this is being given proper attention if an insurance transaction is within touching distance.”

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