WTW’s FTSE 350 DB pension report 2023 analyses the accounts of FTSE350 companies that have 31 December year-ends and defined benefit pension obligations on their balance sheets.
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Over the course of 2022, the value of defined benefit (DB) liabilities recorded in these companies’ accounts fell by around a third; this reflected sharp rises in bond yields, which were responding to rates of inflation not seen since the 1980s.
Asset values fell slightly less dramatically, allowing two-thirds of companies to report an improvement in pension funding levels over the year. The proportion recording pension surpluses nudged up from 62% to 65%, having been just 38% at the end of 2020. Aggregate funding levels increased from 107% to 111%, and the total cash value of surpluses rose from £32bn to £38bn.
A high watermark for DB contributions?
One reason for this is that deficit contributions continued to be paid. The funding targets agreed with pension trustees are typically above accounting liabilities, and there can be lags between funding levels improving and deficit contributions being switched off.
2022 is likely to prove a high watermark for companies’ spending on DB pensions. Fewer will need to make deficit payments in 2023, while higher interest rates should reduce the cost of new benefit promises. This could well be the year in which this subset of FTSE350 companies (which does not include any who never offered DB pensions in the first place) spends more on DC contributions than on DB.
Endgames in focus: offloading the pension scheme vs benefiting from it
Around one-fifth of these companies could, in theory, buy out their pension obligations with an insurer in full, without having to inject additional cash. In practice, they would run into capacity constraints in the bulk annuity market if they all tried to do so at once. Some may also prefer to invest with the aim of generating further surpluses that could benefit employers and scheme members.
Life expectancy unchanged – but falls likely in the next sets of accounts
Companies reported that male pension scheme members aged 65 are on average expected to live to around 87, while females are on average expected to live to around 89. These life expectancies are about a year shorter than the peak numbers disclosed in 2014 accounts – and improvements would have been expected over those eight years.
There was not much change year-on-year, but reductions could resume in 2023; an update to the Continuous Mortality Investigation model, which is used to project future mortality rates, might typically reduce life expectancies by three to six months.
