Explaining the reasons for the fall in contributions, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says: "This last year has seen the largest year-on-year fall in aggregate contributions into DB schemes in the FTSE 350 over the last 10 years. We’re likely to be seeing this because schemes that have hedged are now starting to reach full funding on technical provisions. So, some will be in a position to start turning off their deficit contributions.
“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. Our analysis shows that over 50% of the FTSE 350 DB pension schemes are likely to be in segment A. To qualify for this they are already reasonably well funded and we expect that 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.
“Our report reveals that 20% of companies are likely to be in segments D and E. They are more likely to consider the ‘bespoke’ funding route to manage cash contribution levels, even if this risks regulatory intervention. The ‘bespoke’ route may also be an attractive option for corporates that are willing to provide security or contingency plans to support a lower funding target or longer recovery plan.”
As the move towards consolidation continues and the market waits for commercial consolidators to take off, the report found that 84% of FTSE 350 DB schemes have a funding level that enables access to commercial consolidators, and meet the ‘gateway test.’ The ‘gateway 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.
Commenting on the significance of the gateway test, Alistair continues: “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. 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. The offer needs to be considered even more seriously if there are concerns over the level of long-term covenant support.”
Despite a volatile year, the funding position of FTSE 350 DB Pension Schemes was in surplus for most of the year and 93% of companies could pay off their IAS19 deficit with less than six months earnings.
Alistair continues: “It was a year of volatile markets and companies that have taken an active decision to reduce pensions risk over the past few years are clearly seeing this pay off. The report suggests that the majority of companies remain well placed to support their pension schemes.”
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