LONDON, 24 May 2021 – FTSE 350 companies’ defined benefit pension schemes have been in surplus, on aggregate, on almost every day this year, according to Willis Towers Watson. This represents the longest sustained period of accounting surpluses for more than a decade. On 18 May, the aggregate pension surplus for the FTSE 350 is estimated at around £30bn (a funding level of 104%).
Edd Collins, a senior director at Willis Towers Watson, said: “Some companies will be emerging from the pandemic in the unusual position of not seeing their pension scheme creating a hole in their balance sheet.
“Pension deficits briefly turned into surpluses at the start of the pandemic – when market turmoil sees investors shun corporate bonds, the rise in interest rates can make the pension liabilities recorded in company accounts look smaller. That proved fleeting, but this year has seen a more sustained improvement, with liabilities falling more sharply than asset values during the first few months of 2021.
“Deficits are measured differently when it comes to negotiating funding agreements with pension scheme trustees. Recent experience has been positive here, too – albeit with some variation from scheme to scheme. That may reduce the cash injections needed for schemes to continue their de-risking journeys – though, with the pandemic illustrating the risks schemes face, some trustees may seek to go further and faster in making pension benefits secure.”
“Some companies will be emerging from the pandemic in the unusual position of not seeing their pension scheme creating a hole in their balance sheet.”
Edd Collins | Senior Director
In new research, Willis Towers Watson analysed the annual reports of the 94 FTSE 350 companies who both sponsor defined benefit pension scheme and had a financial year that ended on 31 December. An estimated 74% of these companies made deficit contributions in 2020, down from 80% in 2019. Where deficit contributions were made, the median amount paid in 2020 was estimated at £15 million, up 8% on 20191.
Edd Collins said: “Early in the pandemic, the Pensions Regulator said trustees could allow cash-strapped employers to pause the deficit contributions they had signed up to, though with strict conditions to stop resources draining out of vulnerable companies. This was not widely taken up – the Regulator said that only 3% or 4% of schemes had used this facility by October. There has, though, been a slight drop in the aggregate value of FTSE 350 deficit contributions, from £4.9bn to £4.5bn. This may reflect a few firms in hard-hit sectors making bigger changes while most companies continued paying what they had agreed to.
“A much more common way for companies to preserve cash has been to reduce dividends. In 2019, only 8% of companies paying deficit contributions paid less to shareholders than to their pension scheme. In 2020, that rose to 43%. As corporate revenues recover, some companies may argue that keeping pension payments steady and allowing dividends to vary applies equally in good times as well as bad.”
The life expectancy numbers disclosed in companies’ accounts barely changed in 2020. The average life expectancy reported for men aged 65 was 87.1 (down from 87.2 in 2019). For women, it was 88.9 (up from 88.7 in 2019).
Edd Collins said: “Life expectancy assumptions had been gradually falling since 2014, as anticipated improvements have failed to materialise. The much larger number of extra deaths seen in 2020 will not feed into future expectations in the same way because the pandemic is viewed as a one-off event rather than a feature of a typical year. COVID-19’s knock-on effects could alter mortality rates significantly, but companies regard it as too early to take a firm view on that. Unanticipated deaths of, mostly older, pension scheme members in 2020 have had a marginal impact on company balance sheets, perhaps reducing liabilities by 0.1-0.2%.”
Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas – the dynamic formula that drives business performance. Together, we unlock potential.
1. Companies are not required to disclose deficit contributions. Willis Towers Watson approximated these values by deducting the cost of newly accrued benefits, as measured under accounting rules, from total contributions.
