Pandemic could accelerate FTSE 350 DB schemes' time to buyout by 35%

FTSE 350 defined benefit (DB) schemes could see their time to buyout fall by over a third under worst-case scenarios for life expectancy, putting them on track to reach their endgame in March 2026, according to Barnett Waddingham (BW).

In its most negative modelled scenario of life expectancy, BW predicted that within twelve months, the average time to buyout could fall from 7 years 5 months to 4 years 10 months, a fall of 35 per cent.

The firm pointed out that economic circumstances of the pandemic had led the aggregate buyout deficit of the DB pension schemes of FTSE350 companies to fall by £80bn since the end of May last year, to a total of £130bn.

Additionally, it argued that negative consequences for life expectancy of the pandemic, including Covid-19 itself, broader missed medical diagnoses, a volatile flu season, and the impact of austerity could continue to have a significant impact on pension scheme liability values.

However, BW also noted that the pandemic could have some positive consequences for life expectancy, including improved public hygiene, a stronger post-pandemic population and further advances in medical science.

As such, a more positive scenario where life expectancy increased significantly following the pandemic and there were no negative consequences led the time to buyout being pushed up to 8 years 3 months, a 10 month increase to August 2029.

BW urged trustees and companies to consider the potential impact of the change in mortality on their scheme’s journey plan and whether now was a good time to manage their longevity risk.

BW principal and head of longevity risk transactions, Simon Bramwell, said: “While the worst of the financial shockwaves has passed the longer term impact of the pandemic on our society, and the life expectancies of our population, is far from understood or certain.

“It is of course a sensitive subject, but trustees and companies must take these considerations into their journey plans if they hope to take strategic action and manage their funding positions.

“Despite record volumes of pension de-risking activity in the last few years – with more than £100bn of UK DB pension scheme liabilities being transferred over 2019 and 2020 – there remains a substantial amount of DB pension scheme risk on FTSE350 company balance sheets. It now falls to schemes to de-risk accordingly and keep on a clear path to their endgame.”

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