FTSE 350 companies are in the strongest position to support their defined benefit schemes since the 2007/08 financial crisis, a new report has found. However, the gap between the index’s winners and losers continues to rise.
PwC’s Pensions Support Index grew to a score of 87, from 69 last year. The index, which follows the relationship between the financial strength of FTSE 350 companies and their DB schemes, peaked at 88 in 2007.
he findings accompany a £16bn drop in the FTSE 350 deficit across May. According to consultancy Mercer, asset values rose by £15bn while liabilities fell by £1bn. The deficit stands at £34bn.
Pensions appear to have broadly returned to their pre-crisis health. FTSE 100 pension schemes reflected a year-end accounting surplus for the first time since the financial crash, according to consultancy LCP last month.
What we’ll see is sponsors looking at other ways of providing security
Alan Baker, Mercer
Pensions Expert recently reported housebuilder and FTSE 100 member Taylor Wimpey’s decision to take its pension scheme into the black with a £23m injection, in a sign that listed companies are taking their DB pensions obligations seriously.
The picture is more positive than last year, when FTSE 350 companies were at their weakest in their ability to support their schemes since the global crash. But the picture is not entirely rosy, with distress in the retail sector and Brexit uncertainty, and some companies are struggling.
Try to avoid taking the Frank Field test
Jonathon Land, a partner who leads PwC’s pensions credit advisory team, said that the unforeseen collapse of construction services company Carillion has led other listed companies to consider the impact of pensions on their businesses and reputations.
Carillion’s demise left a net pension liability of around £2.6bn. 27,000 members of its DB schemes were destined for the Pension Protection Fund.
“I think it’s made a lot of people think, ‘well, if the music stopped tomorrow on my scheme, how would people judge me?’”, he said.
Land called this the “Frank Field test”, in reference to the pugilistic chair of the Work and Pensions Committee, who responded ferociously to the Carillion disaster.
A “polarisation” has taken place across companies’ ability to support their schemes, according to Land, who observed that “some are actually really struggling, and still have very significant deficits”.
Trustees must pay attention to Brexit
The government’s lack of clarity and consultation over Brexit have caused consternation among businesses. Brexit is likely to result in “some business models” being “fundamentally changed”, according to PwC.
Alan Baker, head of Mercer’s DB solutions development team, pointed to “considerable” uncertainty looking forward, as well as ongoing volatility.
“Clearly one of the uncertain areas is the implications of Brexit and trustees do need to consider both the potential impact on markets, but also on the strength of their employers business,” Baker said.
Baker predicted that sponsors would look to avoid putting more cash into their schemes in order to avoid generating a surplus.
“I think what we’ll see is sponsors looking at other ways of providing security, whether that’s escrows or surety bonds, or more complex special purpose vehicles,” he said.
Plan for crisis before it happens
Following the completion of its scheme’s triennial valuation on September 25 2017, which established an actuarial deficit of £50m, investment company 3i agreed a funding plan based on a number of triggers.
The FTSE 100 company’s annual report reads: “The Group has agreed to pay up to £50m to the scheme if its gearing increases above 20 per cent, gross debt exceeds £1bn, or net assets fall below £2bn.”
A spokesperson for the company said that these thresholds, which were agreed with the plan’s trustees, were “intended to be signals of a material change in 3i Group plc’s employer covenant”.
Taylor Wimpey pension plan reaches full funding
Trustees of housebuilder Taylor Wimpey’s pension plan, which completed a medically underwritten mortality study last year, have announced that the scheme has reached full funding following a £23m injection from the company in April.
Marian Elliott, head of actuarial at consultancy Redington, highlighted the importance of trustees understanding their sponsor’s industry and establishing contingency plans in advance of a crisis.
The current health of a FTSE 350 employer “is not as important for trustees as an assessment of how likely they are to meet these obligations over the next 15-20 years”, she said.
“Understanding the drivers behind the employer’s industry, as well as their individual business, is important. When these start to change, it may signal the need for the trustees and company to revisit their funding strategy to ensure it remains appropriate,” she added.
