Defined benefit solvency deficit soars to £210bn

The FTSE 350 defined benefit (DB) pension solvency deficit increased by £45 billion to £210 billion over the first five months of the year, according to new research from Barnett Waddingham.

The report said FTSE 350 companies with defined benefit (DB) pension schemes have been hit especially hard by the economic crisis caused by Covid-19.

“As market cap values have plummeted, DB pension obligations have shot up, leading to a widening funding gap,” said Barnett Waddingham.

“The UK stock market has struggled to deal with the dramatic economic fallout of the pandemic, leading to a decline in market capitalisation. 

“Looking specifically at FTSE350 companies with DB schemes, month-end market cap fell by 21% from the beginning of the year to the end of May, and even that showed a slight recovery from the end of March. 

“Delving into the detail, DB sponsors in the consumer discretionary, financials, and energy sectors suffered the most, with the latter’s market cap falling by close to 40% by the end of April as the oil price tumbled, while healthcare, utilities, IT and consumer staples companies performed relatively well.

“As the economic value of these companies fell, the cost of ultimately settling their DB pension obligations skyrocketed. 

“Barnett Waddingham has calculated the estimated change in the overall deficit on a solvency basis to reveal that at the peak of the crisis, the solvency deficit for the FTSE350 exceeded 17% of the market cap, double the proportion at the start of the year, before settling back to 14% at the end of May.

“This equates to a £45bn increase in the solvency deficit for FTSE 350 companies over the first five months of the year, a huge proportion of the current £210bn total.”

Barnett Waddingham partner Simon Taylor said: “Of course, DB pension scheme funding is a long-term enterprise, and this shortfall will not need to be met any time soon, but the regulatory direction of travel will be causing concern for some companies.  

“TPR is not pushing for schemes to reach buyout funding levels, but the aim for schemes to fund up to a low dependency basis will require a material proportion of the current estimated £210bn FTSE 350 solvency deficit to be covered over the coming years.

“Unfortunately some organisations will not recover from this crisis — achieving security for the benefits promised to members will be of paramount importance when some of these difficult discussions commence. 

“Those responsible for endgame funding strategy should be carefully reviewing the impact of the recent crisis, and where necessary rethinking their journey plan to reflect the changed environment, incorporating the changes to covenant strength and funding position within the overall funding and investment strategy.”