Covid-19 longevity impact could cut FTSE 100 pension contributions by £1bn annually

The wider healthcare impact of the pandemic could reduce longer-term contribution requirements for FTSE 100 companies by around £5bn, potentially resulting in a £1bn reduction per year in contribution requirements, analysis from LCP has suggested.

The firm’s latest Leading the Way report revealed that the medium- to longer-term impact of the pandemic could result in falls in pension liabilities by 1-2 per cent for typical schemes, compared to pre-pandemic levels.

Given this, it estimated that FTSE 100 schemes could benefit from a £1bn per annum reduction in annual contribution requirements if efficient use is made of contingent asset or contribution approaches

However, LCP also clarified that, due to continued uncertainty around the impact of the pandemic, achieving these reductions would likely require a proactive approach from sponsors and the continued evolution of contingent asset or contribution mechanisms.

In addition to this, the research revealed that around 50 per cent of FTSE 100 companies may already be fully funded using ‘low reliance' assumptions, which LCP suggested could be consistent with the new longer term funding requirements expected from the regulator later in the year.

In light of this, LCP suggested that a key emerging goal will naturally be to find ways to complete journey plans, without significant additional or unexpected cash strain.

LCP partner, Steve Taylor, commented: “There is room for optimism, with many of the UK’s largest schemes now fully funded using 'low reliance' assumptions even before allowance is made for the potential impact of the pandemic on future life expectancy trends.

“Whilst this all appears good news for sponsors, these developments come with a fresh set of challenges and uncertainties, including the impact of the Pension Schemes Act 2021 and the new funding regulations. For some sponsors we predict this will enhance the business case for an insurance solution for their scheme.

“In all cases, agreeing an appropriate long-term funding target between companies and schemes will be crucial and means that for all sponsors the pensions decisions they make today will likely have a profound influence on how their schemes evolve.

“In our experience, those sponsors who take a proactive approach with the scheme trustees around these discussions achieve better outcomes which align with their corporate strategy.”

Adding to this, LCP head of health analytics, Jonathan Pearson-Stuttard, noted that life expectancies are among the most material assumptions used to assess pension scheme funding requirements.

"This means that for sponsors of schemes at or close to full funding, obtaining clarity in this area is likely to be vital to their pension strategies in the years ahead," he continued.

“In the early phases of the Covid-19 pandemic, many schemes took the view that there was insufficient longitudinal data to inform quantitative estimates of the impact of Covid-19 on their populations.

"It is notable that to date very few defined benefit schemes have moved to reflect the impact of the pandemic on their memberships."

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