Bina Mistry: The days of DB schemes being a major call on company resources look to be behind us
Around half of FTSE 350 companies with defined benefit (DB) schemes could now have surpluses on a low dependency basis, latest WTW analysis finds.
The consultancy's analysis of the reports and accounts of the 82 FTSE 350 DB sponsors with 31 December 2024 year ends found the aggregate funding level of their DB schemes was 109%, with 64% of companies recording a surplus. It said aggregate assets exceeded liabilities by around £30bn – similar to the previous year's £29bn.
WTW estimated that around half of the companies in this analysis could also have surpluses on the more prudent low dependency basis that is used in the new scheme funding regime. This comes after the government said it was "minded" to permit trustees to make payments to an employer where schemes would remain fully funded against their low dependency liabilities.
The analysis found that, in 2024, DB sponsors paid twice as much into defined contribution (DC) schemes as they paid into DB schemes. 2023 had been the first time that DC contributions exceeded DB contributions for DB sponsors.
It also revealed that overall pension spending has fallen by around 30% over two years – adding that the rise in DC contributions, driven by higher membership and wages, had not matched the fall in DB costs as deficit contributions have shrunk (£1.6bn in 2024 compared with £6.6bn in 2022) and as higher interest rates have reduced the cost of new accrual.
WTW added that assumed male life expectancy at 65 continued to fall – from 86.7 in 2023 to 86.5 in 2024 – and was 18 months lower in 2024 than in 2014. It said female life expectancy rose year-on-year from 88.5 to 88.7. However, it said the gap between male and female life expectancy should narrow again soon – explaining that 2025 accounts are likely to use a different projection model which should increase life expectancy at retirement, especially for men.
WTW head of corporate pension consulting Bina Mistry said: "The days of DB schemes being a major call on company resources look to be behind us. Deficit contributions have dried up to a comparative trickle, risks have been hedged, and attention is shifting to the healthy surpluses that many schemes now enjoy."
Mistry said that, for some employers, the priority would be to use stronger funding positions to get liabilities off their balance sheets as soon as they can – but added that others are considering the opportunities for both members and sponsors to benefit from running the scheme on for longer.
She explained: "Policy changes should make it easier for surpluses to be shared between employer and scheme members, but these are not expected to be in force for more than two years. In the meantime, companies can explore using surplus in other ways, such as to meet pension costs (either in respect of DB accrual or DC contributions for those in the same trust) for current employees or to cover scheme expenses, as some are already doing.
"The Pensions Regulator has told trustees to think about how they would respond to proposals from the employer for releasing surplus funds and has suggested that sitting on a material surplus for a long time with no plan to use it may indicate poor governance."
