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Industry Voice: FTSE 350 pensions - Where are companies on the endgame journey?

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Industry Voice: FTSE 350 pensions - Where are companies on the endgame journey?

Driven by an increase in corporate bond yields and the continuing payment of deficit contributions, 2018 was a positive year for the disclosed financial position of the FTSE 350's defined benefit (DB) schemes, with the aggregate deficit decreasing from £55bn to £39bn over the year.

The increasing relevance of an endgame target

Reaching full funding on an IAS19 basis will be a key milestone, but for many it is just a marker on the journey towards the endgame. For most companies, the ultimate objective will be to buyout the DB scheme with an insurance company, and our data suggests this is now a realistic medium-term goal for the majority of the FTSE 350 companies.

One in five FTSE 350 companies could be in a position to buyout their DB scheme in the next 5 years, with just over half being in a position to buyout within 10 years. 

A period of strong growth for the majority of FTSE 350 companies means many have significantly increased their cash holdings.  Based on our analysis, around 20% of the FTSE350 companies could now afford to buyout their DB scheme using less than 10% of the cash sitting on their balance sheet. Whilst there will be many competing pressures for this cash, we believe this should signal the arrival of the DB pensions endgame for many more companies.

Monitoring progress on the endgame journey

A key objective for all DB scheme sponsors should now be to set a clear target and establish the right strategy to navigate the endgame journey.  Once agreed, a robust process for monitoring progress towards the endgame is vital and will allow companies to capture opportunities that may arise, whilst providing early warnings of any adverse experience emerging.

Over 2019, market changes have resulted in an increase in the aggregate deficit - for many, this will push out the timescales to buyout. This highlights the importance of having in place a robust monitoring process to ensure opportunities are captured when market conditions allow.

 

Barnett Waddingham LLP is authorised and regulated by the Financial Conduct Authority and is licensed by the Institute and Faculty of Actuaries for a range of investment business activities.

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