Nearly all (94%) saw their pension funding level improve over the course of the year.
Improving funding levels
The aggregate balance sheet position for these 89 companies changed from a £1bn deficit at the end of 2020 to a £32bn surplus at the end of 2021, with the aggregate funding level up from 99% to 106%. WTW’s analysis of market movements indicates that the aggregate position moved into surplus on 5 January 2021 and has not been back in the red since. The aggregate £32bn surplus reported at the end of 2021 is estimated to have grown to £58bn by 19 May 2022.
Charles Rodgers, head of global pension accounting at WTW, said: “Rising credit spreads have held down the pension liabilities in company accounts, which discount anticipated pension payments based on high quality corporate bond yields. Schemes with large holdings of either equities or gilts will have seen these assets outperform corporate bond-based liability measures.
“Reporting a pension surplus in your accounts does not mean you can stop paying deficit contributions: the funding targets agreed with pension trustees are typically more onerous. However, many schemes are well-funded on these bases too and caps on inflation-linked pension increases could deliver a further improvement this year. As these schemes focus on reaching their long-term objectives, such as buying out benefits with an insurance company, companies and trustees will need to negotiate whether the journey plan must involve further cash injections or whether it can rely on investment performance in the first instance.”
Deficit contributions and dividends
Around three-quarters of FTSE 350 sponsors in the analysis are estimated to have paid deficit contributions in 2021 (77%), which was virtually unchanged from 2020 (76%). Median deficit contributions increased slightly, from £15.3 million to £16.0 million, while aggregate payments rose from £4.4bn to £4.6bn.
The proportion of companies where deficit payments were at least equal to dividends fell from 43% in 2020 to 19% in 2021. This is still more than double the pre-pandemic level (8% in 2019), reflecting how the recovery has not been uniform across all companies. However, the proportion of companies where dividends are at least 20 times as big as deficit payments has fully recovered (38% in 2021, compared with 25% in 2019 and 34% in 2020).
Charles Rodgers said: “Deficit contributions held up well at the height of the pandemic, with far fewer companies negotiating changes than had been feared. The change in the dividend-to-deficit payment ratio reflects dividends being switched back on rather than pension contributions being switched off, though improving funding levels may also affect these numbers in future.”
Scheme closure: the trend continues
The trend towards closing defined benefit plans to further accrual by existing members continued in 2021: 35% of companies reported that some employees continued to accrue defined benefit pensions, down from 39% in 2020. This figure had been 69% as recently as 2015.
Charles Rodgers said: “We may be reaching a point where this trend slows: the particular circumstances of some schemes with ongoing accrual may make them difficult to close, while rising bond yields could reduce accrual costs. The cost-of-living crisis may also stiffen opposition to closure from unions and affected employees, though some employers could argue that controlling pension spending could help make pay rises affordable for the wider workforce.”
Life expectancy: fall since 2014 shaves 3%-4% off liabilities
On average, companies assumed that male scheme members aged 65 in 2021 would die aged 87.0 years, and women at 88.6 years. Disclosed life expectancies for current 65 year-olds are lower than at any point in the past decade.
Charles Rodgers said: “Since the 2014 peak, reported life expectancies are down about a year for men and 17 months for women. That amounts to 3% or 4% off liabilities.”
WTW’s FTSE 350 DB pension scheme report 2022
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