Actual spending by FTSE350 firms on defined benefit (DB) pensions has fallen from £19 billion to £15 billion, according to analysis in Hymans Robertson’s 2019 FTSE 350 DB Pensions Report. This is the largest year-on-year fall in the last 10 years.
In a year that has seen the Pensions Regulator (TPR) continue a tougher approach and offer a clearer indication of its funding regime, the report also found that over half of FTSE350 DB pension schemes are able to well support their pension scheme and likely to fall into segment “A” in TPR’s new categorisation.
Alistair Russell-Smith, head of corporate DB at Hymans, said: “A key decision for corporates over 2020 and 2021 will be whether to adopt the ‘fast track’ or ‘bespoke’ funding approach for their DB schemes under the new regulatory regime expected to come into force in 2021.”
Hymans’ analysis shows that more than 50% of the FTSE350 DB pension schemes are likely to be in segment A. To qualify for this they should already be reasonably well funded, and the firm expects most companies in this segment can take the “fast track” route without increasing deficit contributions. “Fast track” is therefore likely to be attractive for these companies to reduce regulatory risk.
As the move towards consolidation continues and the market waits for commercial consolidators to take off, the report found that 84% of FTSE350 DB schemes have a funding level that enables access to commercial consolidators, and meet the “gateway test”. The test requires schemes to be more than five years from full insurance buy-out meaning that commercial consolidation is a viable option under existing regulatory guidance.
“Those corporates with schemes that pass the gateway test would have to pay on average 2.1 times the existing cash commitment all upfront to transfer the scheme to a commercial consolidator,” Russell-Smith explained. This is a significant uplift to the existing cash commitments, meaning trustees should seriously consider a commercial consolidator offer if it is put on the table by their sponsoring employer.