FTSE 350 DB schemes' endgame plans pushed back by falling yields

The average time to buyout for FTSE 350 companies’ defined benefit (DB) pension schemes increased by seven months during September and October 2021, according to analysis by Barnett Waddingham.

The consultancy’s DB End Gauge index estimated the average time to buyout was 10.8 years, as of 31 October 2021.

Barnett Waddingham’s index update in June 2021 revealed that schemes had bounced back from the impact of Covid-19 and the average time to buyout had fallen as a result.

However, recent market volatility and the economic implications of the Autumn Budget has “put pressure” on schemes’ funding goals, according to the firm.

It noted that while equity markets had generally performed well in September and October, there was a fall in the yields of gilts and swaps at longer terms, which increased the value placed on DB scheme liabilities.

“Just as FTSE 350 DB schemes were getting back on track with their funding goals after a big hit from Covid-19, recent movements in swap and bond markets have pushed scheme funding levels in the wrong direction, adding over half a year to endgame targets in a one-month period,” stated Barnett Waddingham partner, Simon Taylor.

“The Chancellor’s Autumn Budget in October is one of the main reasons for this change, with the larger than anticipated reduction in the issuance of government bonds suppressing yields at longer terms. The resulting fall in yields pushed up the value of DB pension scheme liabilities and, without a corresponding change in the valuation of non-bond assets, ultimately extended the time to endgame for the FTSE 350 DB schemes.

“Looking ahead, the recent uptick in UK inflation will be focusing the minds of those managing DB pension schemes. Whilst there are signs that the increase in inflation may prove to be transitory, the outlook is very uncertain – trustees and companies should ensure that they are comfortable that this risk is being managed appropriately as part of the endgame journey.

“DB schemes should ensure that appropriate processes are in place to monitor changes in funding positions, particularly those that are some way along their endgame journey. Even relatively small changes in financial markets can have a large impact on a scheme’s journey plan, so having a strategy in place to take action to capture opportunities or mitigate risk is crucial.”

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