FTSE 350 pension schemes' buyout readiness hit by Covid-19

The proportion of FTSE 350 defined benefit (DB) schemes in a position to buyout in 10 years decreased by 10 percentage points over the first half of the year, according to Barnett Waddingham.

Research from the consultancy conducted at the end of June found that around 55 per cent of surveyed FTSE 350 DB schemes were in a position to buyout within a decade, down from 65 per cent at the start of the year.

Barnett Waddingham said the economic impact of Covid-19 has pushed back endgames significantly, with the average time to buyout among FTSE 350 schemes rising from 8 years and 2 months to 9 years and 2 months over the same period.

For the average time to buyout to return to the position at the start of the year, Barnett Waddingham estimated that FTSE 350 companies would need to step up their deficit contributions by around a third relative to current levels.

The consultancy noted that this was “unlikely to be feasible” and noted that “a number of organisations” had actually decided to defer deficit contributions by the year’s halfway stage.

Based on information from the end of June, Barnett Waddingham said a 50 per cent reduction in deficit contributions would reduce the proportion of FTSE350 schemes able to buyout within 10 years to around 40 per cent, while ceasing all contributions would mean that fewer than half of schemes would be in a position to buyout within 15 years.

Barnett Waddingham partner, Simon Taylor, said: “Understandably, for most companies DB scheme funding will not have been top of the agenda over recent months. However, with the peak of the crisis now hopefully passed, companies and trustees should be assessing the damage caused by recent events and taking a renewed look at their DB funding plans.”

The consultancy pointed out that superfunds might be a solution, noting that around 46 per cent of schemes could be in a position to transfer to a superfund within 5 years, compared to 24 per cent that might be in a position to buyout with an insurance company in the same timeframe.

The proportion of schemes potentially in a position to transfer to a superfund within 10 years was determined to be around 78 per cent, compared to the 55 per cent of schemes potentially able to buyout in the next decade.

Taylor commented: “The introduction of The Pensions Regulator’s interim regulatory regime for superfunds will certainly pique the interest of some companies, with these vehicles potentially offering a cheaper way out for companies burdened by the funding of a DB pension scheme.

“However, careful thought will be required to determine whether this is the best solution for the scheme’s members, taking into account the particular circumstances of the scheme and the sponsoring company.”

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