FTSE 350 pension surplus almost doubles after 2021 deficit exit

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FTSE 350 defined benefit (DB) sponsors with a 31 December year-end recorded a £32bn (€37.5bn) pension surplus on an accounting basis at the end of 2021, the highest accounting surplus in the last decade, and this is estimated to have grown to £58bn by 19 May, according to WTW.

At the end of 2020 the aggregate balance sheet position for these 89 companies was £1bn, moving into surplus on 5 January 2021.

The consultancy’s 11th annual analysis of FTSE 350 company accounts found that 62% of the 89 DB sponsors recorded a pension surplus at the end of 2021, up from 39% a year earlier. The pension funding level improved over the course of the year at nearly all (94%).

The 89 companies together account for around 80% of FTSE350 DB pension obligations. WTW said their aggregate funding level went up from 99% to 106%.

“Rising credit spreads have held down the pension liabilities in company accounts,” said Charles Rodgers, head of global pension accounting at WTW. “Schemes with large holdings of either equities or Gilts will have seen these assets outperform corporate bond-based liability measures.”

He said funding targets agreed with pension trustees were typically more onerous, but many schemes were also well-funded on these bases and caps on inflation-linked pension increases could deliver a further improvement this year.

“As these schemes focus on reaching their long-term objectives, such as buying out benefits with an insurance company, companies and trustees will need to negotiate whether the journey plan must involve further cash injections or whether it can rely on investment performance in the first instance,” he said.

Deficit contributions, dividends, closures and life expectancies

WTW also estimated that around three-quarters of FTSE 350 sponsors had paid deficit contributions in 2021, almost exactly the same proportion as in 2020.

The proportion of companies where deficit payments were at least equal to dividends fell from 43% in 2020 to 19% in 2021, still more than double the pre-pandemic level although the proportion of companies where dividends are at least 20 times as big as deficit payments has fully recovered (38% in 2021, compared with 25% in 2019 and 34% in 2020).

“Deficit contributions held up well at the height of the pandemic, with far fewer companies negotiating changes than had been feared,” said Rodgers.

“The change in the dividend-to-deficit payment ratio reflects dividends being switched back on rather than pension contributions being switched off, though improving funding levels may also affect these numbers in future.”

WTW also looked at scheme closures, finding that 35% of companies reported that some employees continued to accrue DB pensions, down from 39% in 2020 – and 69% in 2015.

With regard to reported life expectancies, it said a decline since 2014 amounted to 3% or 4% of liabilities being shaved off.