Closing the gap – deficit contributions
The chart below shows the estimated aggregate deficit contributions paid by the FTSE 350 companies into their DB schemes over the period since 2009, with some of the larger one-off contributions highlighted.
Clearly the deficit contributions paid by the FTSE 350 companies have provided significant support to these schemes over a challenging period financially for DB scheme funding (with over £80bn paid during the last decade alone).
Looking forward, if the recent improvement in funding levels is maintained, and more and more schemes achieve full funding on their technical provisions basis, we expect the aggregate level of deficit contributions to fall.
However, the fact of the matter is that most schemes still have some way to go before reaching their ultimate endgame target. Our calculations suggest that the aggregate buyout deficit for the FTSE 350 DB schemes was around £90bn at the end of August. Even if full funding has been achieved on a technical provisions basis, companies may see value in paying further contributions if this accelerates the time to achieve the scheme’s endgame target.
Our DB End Gauge index assumes that current company contribution levels continue until buyout is achieved. As mentioned above, the index suggested the average time to buyout for the FTSE 350 schemes was just under 7 years at the end of August. However, in the extreme scenario of company contributions ceasing completely, this would increase the average time to buyout to over 11 years, showing the significant reliance on sponsoring companies to navigate the final steps to endgame.
The chart below shows the proportion of schemes achieving buyout within particular timescales depending on the level of contributions paid by the sponsoring employer.
The chart shows that if current contribution levels continue until buyout is achieved, around 76% of the FTSE 350 DB schemes can expect to be fully funded on an insurance buyout basis within the next 10 years. This figure reduces to around 62% if contributions cease completely.
Doubling current contribution levels would result in around 64% of the FTSE 350 DB schemes being in a position to buyout within the next five years.