FTSE350 defined benefit (DB) schemes paid out £13bn more than they received in contributions last year, raising the risk they could be forced to sell assets at depressed prices.
In its latest FTSE350 Pensions Report, Hymans Robertson says half of all schemes are or soon will be in a cashflow negative scenario. The situation is set to worsen with a likely increase in scheme closures due to legislative changes, with the gap between contributions and payouts expected to rise to £50bn a year over the next 15 years.
This is against a backdrop of ballooning deficits, although these are likely to come down as members take advantage of the pension freedoms, with several of the firm's corporate clients already seeing a significant increase in transfers.
Hymans Robertson partner Jon Hatchett says: "The three big positions taken by most schemes have backfired: equities are at half the level expected in 2000, interest rates have increased liabilities by over 50% and continued rises in longevity have added a further 10-15%.
"Companies need to learn from the experience of the last 15 years and look for opportunities to make their schemes more resilient to risk, thereby reducing the chance of having to pay in more cash in the future or of being forced sellers of growth assets at depressed prices."
Despite the risks of negative cashflow, Hymans Robertson says just 4% of schemes are prioritising investing in assets that will deliver the income needed to pay pensions. It said generating the required income from the assets without being a forced seller at reduced prices should be their priority. Just over two thirds of these schemes are open to accrual but nearly all closed to new entrants some time ago.
Around 40% of the 217 schemes surveyed are still in the growth phase and so remain cashflow positive, and 10% are at the protection phase where they could either lock-down or transfer risk to the insurance market.
Deficits remain volatile despite companies paying in £250bn since 2000. Deficits increased from £40bn to £100bn between July and August this year on the back of falls across both equities and bond yields.
Uptick in transfers
Schemes could see these unwanted deficits fall from the expected uptick in members choosing to transfer their benefits to take advantage of the pension flexibilities introduced in April, however. Early indications show around 30% of members have transferred where companies have actively supported employee understanding of the flexibilities, through clear communications and paid-for financial advice.
If this 30% take-up rate occurred across the entire index, deficits would fall on a long-term basis by £15bn and settle £100bn of pension assets and liabilities over time.
Hatchett says: "While many companies have adopted a ‘wait-and-see' approach, scheme experience and market solutions are now developing, meaning sponsoring companies should revisit how to help former employees make better informed retirement choices."
Solutions have now emerged and most of the FTSE350 are taking or preparing to take action on DB to defined contribution (DC) transfer decisions, the research found.
One of the firm's clients, a manufacturing organisation, wanted to manage DB risk and give staff access to the freedoms as part of a wider benefit change project. Employees were offered the option of taking a partial transfer of their accrued DB benefits to a DC scheme, resulting in 90% opting to transfer. There was a wide range of support offered as part of the benefit change, including video presentations, briefing session and paid-for financial advice.
Hatchett says while there has already been an increase in transfers, it will take several years to really take off.
More schemes to close
The research also showed that most of the 66% of companies still open to accrual will be taking action to limit future accrual over the coming year. The end of contracting out and pension tax changes coming in next April, and the increases in the state pension age from 2019 are the main drivers of change.
Despite higher deficits, Hatchett says the majority of the FTSE350 remain well placed in 2015 to support their DB schemes, with 81% able to pay off their IAS19 deficit with less than six months' earnings. Although pensions are a "headache" for companies, this can be managed without too much expense unless firms "make the wrong decisions", he adds.
"Companies need to understand where their scheme is on the road to reaching maturity. This will help them to prioritise and manage their key pension risks, ultimately delivering more certain outcomes. It also helps companies schedule a body of work to get to their desired destination: being in position where they don't cause any financial strain on their sponsors."
Downgrades have slowed, but indications are that the trend has further to run
Morningstar Investment Management (MIM) has launched a range of three multi-asset funds that will blend active and passive strategies to offer advisers low-cost solutions.
Nearly every trustee is confident of the next stage in their scheme’s strategy, despite almost an equal number being forced to consider replacing plans within the prior 12 months, according to research by Barnett Waddingham.
The government will set up an infrastructure bank to support investment and to co-invest alongside investors including pension funds.