The healthcare impacts of COVID-19 could reduce longer-term contribution requirements for FTSE 100 companies' pension schemes by around £5bn, new analysis has found.
This could correspond with a £1bn annual reduction in contribution requirements for those schemes that are in deficit, according to LCP, which carried out the research.
However, due to continued uncertainty around the impact of the pandemic, achieving these cuts would likely require a proactive approach from sponsors, and the continued evolution of contingent asset or contribution mechanisms.
Based on current evidence, the analysis suggests that the medium to longer-term impact of Covid could result in falls in pension liabilities by 1-2% for typical schemes, compared to pre-pandemic levels.
Moreover, the findings suggest that around half of FTSE 100 companies' pension schemes may already be fully funded using “low reliance” assumptions, which could be consistent with the new longer-term funding requirements expected from the Pensions Regulator later this year.
Steven Taylor, partner at LCP, said: “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.”
While most schemes do now have a formal long-term target, for the largest schemes with over £1bn in assets, the analysis shows that around 50% are currently adopting a run-off approach.
Smaller schemes are more likely to be currently targeting an insurance buy-out or superfund approach, while around one in six schemes of all sizes are yet to formalise their long-term strategies.
LCP said that use of contingency mechanisms such as escrow accounts or contingent contribution agreements can potentially support a level of investment risk being maintained, and allow uncertainties around life expectancy to be navigated without “trapping” contributions if they are not ultimately needed.
Jonathan Pearson-Stuttard, head of health analytics at LCP, said: “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. 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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Author: Chris Seekings