FTSE 350 DB scheme endgames pushed back 18 months by Covid-19 - Barnett Waddingham

The average FTSE 350 defined benefit (DB) scheme had its endgame pushed back by around a year and a half in the first six months of 2020, according to Barnett Waddingham.

The pension consultancy said, based on analysis of data from its asset model, FTSE 350 DB schemes would need an average additional return of 1.4 per cent per annum to get back on track with endgame plans after Covid-19 disruption.

The current average expected investment return of the FTSE 350 DB schemes is 1.6 per cent per annum above the yield on gilts.

However, due to Covid-19 putting substantial pressure on their funding levels, Barnett Waddingham stated that, as of 31 July, the schemes would need to achieve an average investment return of 3.0 per cent per annum above the yield on gilts to reach the same endgame timeframes expected in December 2019.

The issue is even more distinct among schemes expecting to buyout within 5 years, with the pensions consultancy stating that they would need an additional 2.6 per cent per annum in investment returns to maintain the same timescales, or 4.2 per cent per annum above the yield on government bonds.

According to the analysis, schemes aiming to buyout over a longer timeframe had more of a chance to get back on track through investment returns alone, with schemes aiming to buyout in over 15 years set to only need an additional 0.1 per cent per annum in investment returns to be on target.

Barnett Waddingham stated that Covid-19 had pushed back the average FTSE 350 DB scheme’s endgame by around a year and a half over the six months to the end of June 2020.

Barnett Waddingham partner, Simon Taylor, said: “When the crisis hit, endgame timescales will have been low on the list of issues for FTSE 350 companies, but companies and trustees are now in a position to assess how events have impacted their scheme, and whether they need to adapt existing strategies or create a new plan altogether.

“The recent market volatility provides a clear illustration to companies and trustees of the level of investment risk that they are running. All schemes should be reviewing the movements in funding levels over recent months and consider whether they are truly comfortable with this level of risk given the potential financial implications.

“Companies and trustees have a number of levers to get their long-term plan back on track, and all options should be actively explored. Unfortunately, the reality for some schemes will be a delay to the DB endgame.

“More optimistically, putting aside the obvious challenges, recent economic turmoil has created investment opportunities in some pockets of the market. It’s vital for schemes to explore options to refine their investment strategies and take advantage of market volatility where possible.”

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