FTSE 350 DB schemes 'bounce back' amid Covid-19 recovery

FTSE 350 firms’ defined benefit (DB) pension schemes have “bounced back” from the economic impact of the Covid-19 pandemic, and are now beating pre-Covid expectations, according to research from Barnett Waddingham.

The analysis revealed that the average time to buyout is now estimated at around 7 years and 5 months, compared to 9 years and 3 months in December 2019.

Assuming the deficit contributions paid over 2020 continue, Barnett Waddingham also estimated that 61 per cent of the FTSE350 DB schemes can expect to be in a position for buyout within 10 years.

The provider emphasised that whilst FTSE 350 companies with DB schemes were "hit especially hard” by the economic crisis in 2020, the majority of schemes are now back on track with their funding goals, thanks to a rebound in the financial markets.

This saw equity markets up by over 20 per cent at the end of May 2021 compared to May 2020, while index-linked bond yields were up by around 25 basis points over the same period.

This, in turn, has lead to a fall in the aggregate buyout deficit of FTSE 350 DB schemes to £130bn, a reduction of £80bn since the end of May 2020.

Deficit contribution levels also fell by around £1.6bn in 2020, excluding a one-off £1bn payment made by BAE systems, representing a fall of around 18 per cent on aggregate.

However, the research showed that less than a third of this was a result of Covid-19 deferrals, with the main reason for contribution reductions being changes to recovery plans as scheme funding levels improved in the period prior to the pandemic.

Furthermore, the firm found that dividends to shareholders also fell by around 38 per cent, or £34bn, over the year.

Commenting on the findings, Barnett Waddingham partner, Simon Taylor, said: “The Covid-19 crisis caused severe disruption across the world economy, and the UK’s pension landscape was no exception.

“However, it seems that the worst has passed, and the winds of change are blowing in a more optimistic direction. C-suites and trustee boards alike will be breathing a sigh of relief that the Covid-19 funding gap appears to have been resolved without the need for a significant cash outlay.

“But we must not rest on our laurels. There will undoubtedly be more challenging times ahead for DB schemes. If the past year and a half has proved anything, it is that a journey plan is the strongest tool in any strategic leader’s arsenal, and that is especially true for those managing a DB scheme."

He added: “Being clear what a scheme’s objective is and agreeing a plan with clear risk parameters helps to put significant financial market changes into context. Having a clear decision-making framework also allows action to be taken quickly where necessary, and to capitalise on any opportunities that might arise.

“The material improvement in funding positions over the last few months is a good example of how journey plans can add significant value.

“A robust real-time monitoring framework will have identified this step change in funding levels, allowing companies and trustees to take action to reduce risk and lock in the positive investment returns experienced over recent months.”

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