Increased gilt and swap yields have driven the average time needed for FTSE 350 pension schemes to buyout their defined benefit (DB) liabilities to a historic low, Barnett Waddingham analysis reveals.
The consultant's DB end gauge index revealed that, over the month to 31 May, the average time to buyout for FTSE 350 DB pension schemes fell by one year and four months to 8.3 years.
It said this means the average DB scheme should reach its endgame in around 8.3 years - the lowest figure recorded since Barnett Waddingham launched its monthly end gauge analysis in December 2020.
This significant fall in May accelerates the downward trend witnessed over the previous two months - in total, the index has fallen by more than two years since the end of February 2022.
Barnett Waddingham said the decrease in the index was mainly driven by an increase in gilt and swap yields, which reduced overall liability values. He added a volatile month for financial markets saw growth assets settle at a similar level to the start of the month.
Partner Simon Taylor explained: "Inflation fears and the corresponding monetary tightening by central banks has sent long-term bond yields to a level not seen for around a decade. The impact on pension scheme funding levels has been astonishing, with most schemes seeing a marked improvement despite growth market volatility and increased inflation expectations.
On top of this, there has been a widening in credit spreads over the last few weeks which has made bulk annuity pricing significantly more attractive. The upshot of this is an array of opportunities for companies to reduce risk and lock in some of the gains from recent months.
"A robust monitoring process will allow companies to capture these opportunities as soon as they arise, providing a solid foundation to control risk along the journey to the scheme's endgame."
Taylor added: "The significant improvement in funding positions should also be focusing attention on buyout readiness. It's not enough to simply achieve the required funding position - reviewing the scheme's data and legal documentation is a fundamental component of the journey plan, as is considering the potential impact of member options. Companies will want to ensure that this is being given proper attention if an insurance transaction is within touching distance."
Barnett Waddingham's DB end gauge is calculated using publicly available data collected from the annual accounts of the FTSE 350 companies. As such, it covers around 160 companies with DB pension arrangements and is calculated as the average of the estimated time to reach buyout funding for each scheme.
This comes as DB funding has significantly improved - with the PPF7800 index posting a combined surplus of £261.6bn on a section 179 basis and Mercer's pensions risk survey data, calculated using an accounting methodology, showing a fall in FTSE 350 deficits to just £4bn during the month.