Pandemic hits FTSE350 DB pensions schemes hard

FTSE350 companies with defined benefit (DB) pension schemes have been hit “especially hard” by the economic crisis resulting from COVID-19, according to research from Barnett Waddingham.

The financial consultant suggested that at the beginning of the year, the outlook for the UK’s DB schemes was positive, following a period of strong equity market performance and falling inflation expectations.

As lockdown has caused markets to plummet, however, the research showed this has resulted in a steep fall in funding levels for any schemes with a material equity allocation. While equities have started to recover since the lows at the end of March, Barnett Waddingham indicated that yields on index-linked bonds remain around 0.5% lower than they were at the start of the year – putting strain on funding levels for any schemes with unhedged liabilities.

Based on the position at the end of June, the firm’s data suggests that around 55% of the FTSE350 DB schemes can now expect to be in a position to buyout within 10 years, which is down from 65% at the start of the year. The average time to buyout increased from eight years and two months at the end of December 2019, up to nine years and two months at the end of June 2020.

Furthermore, for the average time to buyout to return to the position at the start of the year, the consultant’s research revealed that FTSE350 companies would need to step up their deficit contributions by around a third relative to current levels. Given the challenges that a number of companies are currently facing, Barnett Waddingham described this as “unlikely to be feasible”.

“Understandably, for most companies DB scheme funding will not have been top of the agenda over recent months,” Barnett Waddingham partner, Simon Taylor, commented.

“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.

“For those responsible for DB funding, a delicate balance will be needed to ensure that the DB funding plan does not jeopardise the company’s ability to rebuild its business, whilst at the same time ensuring that the security of member benefits is not compromised.

“With the peak of the crisis behind us, the challenge for the pensions industry will be to decide how the funding of DB schemes fits into the picture of an economy in recovery.”

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