FTSE 350 DB solvency deficit rises by £45bn amid Covid-19

The FTSE 350 defined benefit (DB) solvency deficit increased by £45bn over the first five months of the year, according to Barnett Waddingham.

The consultancy calculated the estimated change in the overall deficit on a solvency basis to reveal that at the peak of the coronavirus crisis, the solvency deficit for the FTSE 350 exceeded 17 per cent of the market cap, double the proportion at the start of the year, before settling back to 14 per cent at the end of May.

The firm added that the FTSE 350 DB solvency deficit stood at around £210bn in May, up from approximately £165bn in January.

Barnett Waddingham found that DB sponsors in the consumer discretionary, financials, and energy sectors suffered the most, with the latter’s market cap falling almost to 40 per cent by the end of April amid tumbling oil prices, while healthcare, utilities, IT and consumer staples companies performed relatively well.

To illustrate the different experiences of companies from these different sectors, Barnett Waddingham showed that, from the start of 2020 to the end of May, the consumer discretionary sector has seen its solvency deficit as a proportion of market cap climb from around 8 per cent to roughly 13 per cent.

The less affected consumer staples sector saw its solvency deficit as a proportion of market cap rise from 6 per cent to 8 per cent during the same period.

The firm claimed these different fortunes and subsequent recovery efforts meant companies from the two sectors could pursue quite different DB pension scheme funding strategies.

For the consumer discretionary industry, a key metric is likely to be the duration of each company’s DB scheme, as the average duration of the schemes in this sector is around 18 years, so for most schemes this might suggest closing the gap to self-sufficiency over the next decade in order to meet guidelines from The Pensions Regulator.

Barnett Waddingham said that, as the solvency deficit for this sector is thought to be around £19bn, careful thought would be needed to bridge the funding gap.

Meanwhile, companies in the consumer staples sector might want to dedicate some of their additional cash to their pension schemes, with Barnett Waddingham noting that “a trebling of contributions could result in around half of the consumer staples companies being in a position to buyout within 5 years”.

Barnett Waddingham partner, Simon Taylor, said: “The Covid-19 crisis has caused severe disruption across the world economy. The UK’s pension landscape is no exception, and with the peak of the crisis seemingly behind us, those responsible for pension scheme funding will now be taking a deep breath and looking to the future.”

He added that DB pension scheme funding shortfall “will not need to be met any time soon, but the regulatory direction of travel will be causing concern for some companies”, noting that “the aim for schemes to fund up to a low dependency basis will require a material proportion of the current estimated £210bn FTSE 350 solvency deficit to be covered over the coming years”.

Taylor concluded: “Those responsible for endgame funding strategy should be carefully reviewing the impact of the recent crisis, and where necessary rethinking their journey plan to reflect the changed environment, incorporating the changes to covenant strength and funding position within the overall funding and investment strategy.”

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