We kick off this year’s analysis of the FTSE350 defined benefit (DB) market with a look at how schemes have navigated back on course after a dramatic year — and what this means for the future.
The solvency of the UK’s defined benefit (DB) schemes was put under significant pressure last year, with the picture looking extremely challenging for pension scheme funding.
"Fast forward a year, and the situation has changed dramatically. The vast majority of DB schemes are now on surer footing, having comfortably weathered the storm of the initial economic disruption."
Due to a resurgence in financial markets, FTSE350 DB schemes are now ahead of the buyout timescales expected prior to the economic disruption of Covid-19. However, there are challenges ahead.
Reduction in dividends paid by FTSE350 companies with DB schemes.
Reduction in the aggregate buyout deficit for FTSE350 DB schemes.
Average time to buyout, a reduction of almost two years since December 2019.
Percentage of schemes that can expect to be in a position to buyout within ten years.
Endgame journey now back on course
The outlook for the UK economy has also improved, although some companies may hit difficulties once the coronavirus support packages end and business loans need to be repaid. In any event, companies may want to divert resources to rebuilding their covenants in the wake of the virus whilst the Pensions Regulator (TPR) will be keen for DB pension schemes to share in the proceeds of any improving company profitability.
It appears the FTSE350 DB schemes’ journey to the endgame is now firmly back on course – illustrating the importance of developing, monitoring and refining endgame planning, in order to reduce risk and deliver value.
A clear approach
Being clear what the objective is and agreeing a plan with clear risk parameters helps to put significant economic and financial market changes into context. Having a clear decision-making framework also allows action to be taken quickly where necessary, and to capitalise on any opportunities that might arise. This will be especially important for some companies in the year ahead.
Our DB Navigator framework can help companies and trustees chart the DB endgame journey and agree a plan that caters for the needs of trustees, sponsors and shareholders.