FTSE 350 DB contributions in largest fall in 10 years

The aggregate spending on defined benefit (DB) pensions by FTSE 350 firms has fallen by £4bn since 2018, representing the largest year-on-year fall in the last 10 years, Hymans Robertson has revealed.

Aggregate spending on DB pensions in the FTSE 350 fell from £19bn in 2018 to £15bn in 2019, according to its FTSE 350 DB pensions report.

FTSE 350 DB pension schemes remained in surplus for the majority of the year, with a further 93 per cent now able to off their IAS19 deficit with less than six months earnings “despite a volatile year”.

The report also found that over half of FTSE 350 schemes are able to “well support their pensions scheme” and are expected to be in segment A of The Pensions Regulator’s new funding regime.

Commenting on the fall in contributions, Hymans Robertson head of corporate DB, Alistair Russell-Smith, said: “This last year has seen the largest year-on-year fall in aggregate contributions into DB schemes in the FTSE 350 over the last 10 years.

"We’re likely to be seeing this because schemes that have hedged are now starting to reach full funding on technical provisions. So, some will be in a position to start turning off their deficit contributions.

“A key decision for corporates over 2020 and 2021 will be whether to adopt the ‘fast track’ or ‘bespoke’ funding approach for their DB schemes under the new regulatory regime expected to come into force in 2021.

“Our analysis shows that over 50 per cent of the FTSE 350 DB pension schemes are likely to be in segment A.

"To qualify for this they are already reasonably well funded and we expect that most companies in this segment can take the ’fast track’ route without increasing deficit contributions. ‘Fast track’ is therefore likely to be attractive for these companies to reduce regulatory risk.”

The report also found that 84 per cent of FTSE 350 DB schemes have a funding level that enables access to commercial consolidators and meet the ‘gateway test’, which requires schemes to be more than five years from a full buy-out.

Alistair continued: “Those corporates with schemes that pass the gateway test would have to pay on average 2.1 times the existing cash commitment all upfront to transfer the scheme to a commercial consolidator.

“This is a significant uplift to the existing cash commitments, meaning trustees should seriously consider a commercial consolidator offer if it is put on the table by their sponsoring employer. The offer needs to be considered even more seriously if there are concerns over the level of long-term covenant support.”

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