FTSE 350 companies’ defined benefit (DB) pension deficits could be “a thing of the past” with six months of dividend payments reallocated to pensions, according to analysis by Barnett Waddingham.

The consultancy stated that FTSE 350 companies were paying vastly higher dividends than contributions to their DB pension schemes, adding that many companies could get their schemes off their books forever using three to six months of dividend payments.

It noted that dividends paid by FTSE 350 firms with DB pension schemes had rebounded from the Covid-driven crash, increasing to £70.7bn in 2021.

Since then, the dividend recovery has continued to climb, with Link Group estimating that full-year dividends paid by the main market would reach £97.4bn this year.

Barnett Waddingham suggested that this pattern would likely be the same for FTSE 350 firms with DB schemes, although the full-year figure is not yet available.

The Link Group Dividend Monitor revealed that £31.4bn in dividends were paid by the UK main market in Q3.

The aggregate deficit for FTSE 350 companies’ DB schemes had improved from £185bn in December 2021 to approximately £28bn at the end of September 2022.

This comprises estimated buyout liabilities of around £597bn and assets of £569bn.

Hypothetically, Barnett Waddingham stated, three to six months of dividend payments could now wipe DB deficits off FTSE 350 balance sheets for good.

It noted that, due to the improvement in DB scheme funding levels, the amount of dividend payments needed to remove DB scheme risk had decreased from 16 months in December 2021 to closer to three to six months.

“While this may be more of a thought experiment than a plan, it puts into perspective the scale of DB scheme liabilities for companies,” commented Barnett Waddingham partner, Simon Taylor.

“For many, only a small proportion of dividend payments would need to be reallocated to bring schemes to buyout.

“Given the recent volatility in the pensions market, companies are likely to want to get schemes off their balance sheet and over to an insurer or consolidator as soon as possible.

“This would enable companies to focus on their day job rather than managing legacy pension risk. And its likely shareholders would be amendable too; only a brief reduction in dividends to remove exposure to DB pension risk forever.”

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