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The Actuary The magazine of the Institute & Faculty of Actuaries

Huge fall in FTSE 350 pension spending recorded

The UK’s 350 largest listed companies have recorded their largest year-on-year fall in defined benefit (DB) pension spending for a decade, analysis by Hymans Robertson has found.

Deficit contributions fall for DB pensions ©Shutterstock
Deficit contributions fall for DB pensions ©Shutterstock

The researchers said that aggregate spending by FTSE 350 firms fell from £19bn to £15bn between 2018 and 2019, with pension schemes in surplus for the majority of that time.

A massive 93% of schemes could pay off their IAS19 deficit with less than six months earnings, and 84% have a funding level enabling access to commercial consolidators.

“Schemes that have hedged are now starting to reach full funding on technical provisions,” said Hymans Robertson head of corporate DB, Alistair Russell-Smith.

“Some will be in a position to start turning off deficit contributions. A key decision over 2020 and 2021 will be whether to adopt the ‘fast track’ or ‘bespoke’ funding approach.”

The findings come in a year that the Pensions Regulator (TPR) offered a clearer indication of what to expect in a new regulatory funding regime likely to come into force in 2021.

Hymans Robertson said that over half of FTSE 350 DB pension schemes are able to well support their scheme, and are likely to fall into segment ‘A’ in TPR’s new categorisation.

“We expect that most companies in this segment can take the fast-track route without increasing deficit contributions,” Russell-Smith said.

The findings also show that 20% of companies are likely to be in segments ‘D’ and ‘E’, and will probably consider the bespoke funding route to manage cash contribution levels.

Corporates with pension schemes passing the ‘gateway test’ would, on average, have to pay 2.1 times the existing cash commitment upfront to transfer to a commercial consolidator.

"This is a significant uplift to existing cash commitments, meaning trustees should seriously consider a commercial consolidator offer if it is put on the table by their sponsoring employer," Russell-Smith said.

“It was a year of volatile markets, and companies that have taken an active decision to reduce pensions risk over the past few years are clearly seeing this pay off."

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