Nearly half (44%) of FTSE 350 DB pension schemes now in surplus
04 Dec 2018
- 12% of schemes are sufficiently well funded that they could buy-out without a further cash injection
- 9% of companies could get a clean break from their DB scheme by transferring it to a commercial consolidator with a cash injection of no more than one month’s earnings
- More than a fifth (22%) of companies should expect the Regulator to intervene at their next triennial valuation unless they start paying more into their schemes
Nearly half (44%) of FTSE 350 DB pension schemes are now in surplus and 90% of companies could pay off their IAS19 deficit with less than six months earnings, according to analysis by Hymans Robertson in its annual FTSE 350 Pensions Analysis.
As the trend for consolidation gathers pace, the report also found that a significant number of companies could immediately move to a commercial consolidator or take advantage of strong pricing in the risk transfer market. 12% of the FTSE 350 are already sufficiently well-funded that they could buy out today without any cash injection. A further 9% could transfer their pension scheme into a commercial consolidator, achieving a clean break for the employer, with a cash top-up of less than one month’s earnings.
Warning that some companies may still need to prepare for regulatory intervention, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says:
”Despite the funding position of FTSE 350 DB schemes looking healthier than it has for many years, companies must not be complacent. TPR’s been taking an increasingly hard stance in the wake of recent corporate failures. This invigorated Regulator is likely to put greater pressure on companies to fix the roof whilst the sun shines. Recognising this tougher approach and focus on deficit contributions and dividend payments, a minority of companies should plan for regulatory intervention at their next triennial valuation unless they pay more into their schemes. 22% of FTSE 350 companies with a DB pension scheme are paying over 5x more in dividends than pension contributions, despite contributions at this level taking over 8 years to pay off the IAS19 deficit.
“Companies should ensure they get value from any increased spend and avoid the risk of trapped surplus. I expect to see more contingent contribution structures and escrow funding, and in some cases cash injections in return for transferring the scheme in to a commercial consolidator.“
With the report’s analysis finding nearly half of schemes now have an IAS19 surplus, Alistair says end-game planning should now be prioritised:
“Companies that have an IAS19 surplus should look for opportunities for risk transfer and ultimately removing the DB scheme from their balance sheet. To be able to achieve this the first step is to set a Long Term Objective that takes account of both improved insurer and emerging consolidator pricing. Contributions from cash, investment returns, opportunistic buy-ins, time and member options can then be established, giving a clear path for ultimate risk transfer. Many will find that they are closer than they think to getting their pension scheme off balance sheet when they take this approach.”