• Annual FTSE 350 analysis finds DB Pensions Schemes are, on average, 6 years from buy-out.
• Deferring buy-out by 5 years would generate a £100bn surplus across the FTSE 350.
• 45% of the FTSE 350 could adopt Fast Track under the new funding regime without an increase in contributions.
• 55% of the FTSE 350 would see an increase in contributions under Fast Track and should consider alternative Bespoke strategies.

DB Pension scheme members could benefit from a 5% uplift in their pension benefit if the corporate sponsor defers buy-out by 5 years, according to analysis by Hymans Robertson in its annual FTSE 350 DB Pension Scheme survey. This increase in benefit would be a valuable boost to scheme members in a higher inflationary world.

The leading pensions and financial services consultancy looked at the impact of FTSE 350 DB schemes deferring buy-out by 5 years and found that it could generate an aggregate surplus of £100bn. Passing two thirds of this back to sponsors would give the FTSE 350 a cash boost of £70bn, which is 20% of its annual earnings. This would allow schemes to use the remaining third to increase member benefits by about 5%.

The analysis found that on average, DB pensions schemes are 6 years from buy-out. This timescale has come in over 2022 with rising yields and improved insurer pricing. However, insurer capacity, scheme readiness and the accounting settlement loss on buy-out all mean some may choose to defer buy-out leading to this generation of surpluses.

Commenting on the implications and analysis of buy-out deferral, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says:

“The estimate in our 2022 FTSE 350 report has shown that FTSE 350 schemes are, on average, now only 6 years away from being able to secure buy-out with an insurance company. For many DB schemes this will be welcome news and they will be heading on a route to buy-out that it exactly the right path for them. However, for some, deferring buy-out may be an option or even a necessity if there is insufficient insurer capacity to deliver these timescales, if schemes’ data or assets are not ready, or if the accounting settlement loss is not palatable.

“Delaying buy-out clearly comes with the ongoing risk exposure of a DB scheme and should not be taken lightly. However, there are potential benefits in terms of a cash boost for sponsors and a benefit uplift for members.”

The report found that under TPR’s new funding regime 45% of the FTSE 350 should be able to comply with Fast Track without increasing cash contributions. However, complying with Fast Track will increase cash contributions for 55% of the FTSE 350, particularly for the 10% with schemes that are already at significant maturity and need to be fully funded on a prudent Long Term Objective basis.

 Commenting on the impact of the new funding regime on the FTSE 350, Alistair continues:

“With TPR’s second consultation on the new funding regime expected imminently and the regime itself expected to go live in late 2023, now is the time for corporates to start assessing their options. Companies will be able to adopt a “Fast Track” or “Bespoke” funding strategy. While Fast Track meets preferred minimum standards, Bespoke allows more flexibility at the risk of more regulatory intervention. Fast Track would seem the obvious route for the 45% of companies that can adopt this route without increasing contributions. The other 55% should consider their options more carefully, and in particular assess if a reasonable funding plan can be developed under Bespoke without increasing cash contributions.”