LONDON, May 30, 2023 – 2022 is likely to prove a high water mark for UK companies’ spending on defined benefit (DB) pension schemes, according to WTW.
WTW’s analysis of accounts filed by defined benefit scheme sponsors in the FTSE350 with 31 December year-ends revealed that these companies paid £8.9bn into their DB schemes in 2022, and £5.9bn into defined contribution schemes. The DB number, which was the highest cash terms figure since 2018, included £2.3bn to finance new benefit accrual.
Bina Mistry, head of corporate pension consulting at WTW said: “Two thirds of companies disclosed having surpluses in their pension plans but almost three quarters were still paying deficit contributions. This is because funding targets agreed with trustees are often more onerous than the measure of liabilities disclosed in accounts and because there can be a lag between funding levels improving and deficit contributions being switched off.
“There is every chance that 2022 will be a last hurrah for cash injections into DB schemes and that this group of employers will, for the first time, pay more to DC than DB this year. Some large one-off contributions will not be repeated in 2023, while higher interest rates will reduce the costs of providing new benefits to the dwindling number of active members.”
Accounting standards require companies to use the yield on high quality corporate bonds to convert the pension payments they expect their schemes to make in future into a single liability value. Yields rose sharply over 2022, with the average discount rate increasing from 1.91% to 4.85%.
Bina Mistry said: “Principally owing to this jump in yields, the liabilities disclosed to investors have fallen by about a third.”
Assets have also fallen in value, though not enough to stop funding positions from improving. Aggregate funding levels rose from 107% to 111% on an accounting basis; 65% of employers recorded an accounting surplus at the end of 2022 (up from 62% at the end of 2021 and 38% at the end of 2020); and WTW estimates that one in five of these employers now has a pension scheme that is sufficiently well funded to buy out its liabilities in full with an insurer.
Bina Mistry said: “While the immediate effect of improved funding will be to spare some employers from finding the cash for more deficit contributions, it also puts the spotlight on what pension strategies companies and trustees should pursue from now on, and on how better funded schemes should invest their assets.
“The decision on whether and when to buy out does not simply boil down to whether you can afford to. Companies will explore how to get some value from having paid in more than they now think was needed to provide the benefits due to scheme members. For the 30% of employers whose schemes have not completely closed, one option might be using them to fund new benefit accrual. For others, potential uses of funds include discretionary pension increases, refunds to the employer, and in some circumstances DC contributions.
“If the companies who could in theory afford to get liabilities off their balance sheets without stumping up more cash all sought to do so immediately, some would run into capacity constraints: the premiums from these companies alone could be equivalent to roughly three years’ worth of de-risking transactions based on recent volumes.”
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.
Bina Mistry said: “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 model used to project mortality rates might typically reduce life expectancies by three to six months.”
WTW’s FTSE 350 DB Pension Report 2023 analysed the annual reports of the 84 FTSE350 companies who have both a financial year ending on 31 December and defined benefit pension liabilities. Aggregate DB pension liabilities were £353 billion.
At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital.
Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.
Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you.
