Adding up the defined benefit (DB) pension assets and liabilities disclosed by FTSE350 companies with 31 December 2023 year-ends gives an aggregate funding level of 109%.
That is down slightly from the 111% recorded last year, with the fall largely explained by lower discount rates; 2023 saw credit spreads reach their lowest level since 2007, exerting downwards pressure on corporate bond yields.
But it is still a world away from the large deficits that companies used to report. 62% of the companies we analysed had a pension surplus on an accounting basis.
The turnaround in funding positions has many causes - not least the hefty deficit contributions paid in recent decades - but would be less stark if previously anticipated improvements in mortality rates had materialised.
WTW estimates that the assumed average lifespan for a newly retired pensioner would be around two years higher if companies’ latest accounts used the same mortality assumptions as their 2014 annual reports. That would increase liabilities by around 7% - consuming the lion’s share of the 9% surplus.
Instead, 2023 accounts continued the trend of falling life expectancy assumptions seem since 2014. Indeed, comparing 2022 and 2023 accounts gives the biggest year-on-year fall in life expectancy to date – around five months for a 65-year-old – though that may partly reflect companies having decided a year earlier to wait for more evidence before revising their assumptions down by much. A small additional fall may be expected in 2024 accounts, based on the Continuous Mortality Investigation’s latest projections model.
For the first time, we found DB sponsors paying more into their defined contribution (DC) schemes (£6.6bn) than their DB schemes (£5.1bn).
The obvious reasons for this are companies switching off deficit contributions as funding levels improve (and 2023 not seeing the large one-off cash injections recorded in some earlier years) while more employees than ever participated in DC plans.
At the same time, DB accrual costs are lower than they were in the era of ultra-low interest rates. This helps explain why 2023 saw no new closures to accrual amongst this employer population. For some employers, funding DB accrual from a DB surplus will also have been their only way to benefit from it straight away.
As DC gets more money, it should start to receive more attention, with increasing focus on how to get the best balance of risk and return and how to help members who need to make their pot (of ever-changing size) stretch out over a retirement of uncertain length.
For a long time, the investor relations challenge for DB sponsors was explaining a large and volatile hole on their balance sheet. Now, it is more often about communicating whether a company expects to benefit from a net asset, and how strategic pension decisions will affect this.
Some schemes will have a strategy of securing liabilities with an insurer as soon as possible, while others will look to run on and potentially take a modest amount of risk in pursuit of further surpluses that could be shared between the employer and scheme members. Under both approaches, the impact on balance sheets and Profit & Loss (P&L) is something that companies may want to explain further to investors, as well as the wider risk and cost benefits of these decisions.
How a pension scheme buyout affects key financial metrics such as P&L can depend on the circumstances surrounding the transaction. Some companies may want to publish alternative non-GAAP metrics which better represent the business implications and look through any distorting effects on their headline results. Similar considerations will also apply where the aim is to run the scheme on and companies agree to share surpluses with trustees, for example through granting discretionary increases.
| Title | File Type | File Size |
|---|---|---|
| FTSE 350 DB Pension Scheme Report 2024 | .8 MB |
