FTSE 350 companies with defined benefit (DB) pension schemes have been hit particularly hard by the economic crisis caused by Covid-19, latest research from Barnett Waddingham shows.
Research from Barnett Waddingham today (29 June) found the solvency deficit of FTSE 350 pension schemes was up from £45bn in January to £210bn in May.
This comes as the market capitalisation of the same FTSE 350 firms with DB schemes fell by 21% from the beginning of the year to the end of May.
Barnett Waddingham partner Simon Taylor said the steadily widening funding gap was a cause for concern.
"A combination of plunging equity markets and the continued downward march in gilt yields has pushed funding levels further into the red," he said. "Of course, DB funding is a long-term enterprise, and this shortfall will not need to be met anytime soon, but the regulatory direction of travel will be causing concern for some companies."
While The Pensions Regulator (TPR) is not pushing for schemes to reach buyout funding levels, Taylor added the aim for schemes to fund up to a low dependency basis "will require a material proportion" of the £210bn solvency deficit to be covered in the coming years.
TPR proposed schemes should be fully funded on a low dependency basis after duration reaches 12-14 years. Barnett Waddingham added the average duration of the schemes in this sector is around 18 years, so for most schemes closing the gap to self-sufficiency might need to take place "over the next decade".
Taylor said "careful thought will be needed to bridge the funding gap at a time of clear difficulty for the sector".
"Those responsible for endgame funding strategy should be carefully reviewing the impact of the recent crisis, and where necessary, rethinking their journey plan to reflect the changed environment, incorporating the changes to covenant strength and funding position within the overall funding and investment strategy," he said.
"The Covid-19 crisis has caused severe disruption across the world economy - the UK's pension landscape is no exception, and with the peak of the crisis seemingly behind us, those responsible for pension scheme funding will now be taking a deep breath and looking to the future."
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