In total 44 per cent of scheme are now in surplus, and 90 per cent of companies could pay off their IAS19 deficit with less than six months earnings.
However it is not all good news. This analysis shows that more than a fifth of firms (22 per cent) could face regulatory intervention at their next triennial valuation unless they start paying more into their schemes.
As the trend for consolidation gathers pace, the report also found that a significant number of companies could immediately move to a commercial consolidator or take advantage of strong pricing in the risk transfer market.
A total of 12 per cent of the FTSE 350 are already sufficiently well-funded that they could buy-out today without any cash injection. A further 9 per cent could transfer their pension scheme into a commercial consolidator, achieving a clean break for the employer, with a cash top-up of less than one month’s earnings.
Hymans Roberston head of corporate DB, Alistair Russell-Smith says: “Despite the funding position of FTSE350 DB scemes looking healthier than it has for many yeras, companies must not be complacent.
“The Pension Regulator has been taking an increasingly hard stance in the wake of recent corporate failures. This invigorated regulator is likely to put greater pressure on companies to fix the roof whilst the sun shines.”
Earlier this week TPR announced that Southern Water will pay £50m into its pension scheme after concerns that pension contribution were too low when compared to shareholder dividends.
Russell-Smith adds: “Recognising this tougher approach and focus on deficit contributions and dividend payments, a minority of companies should plan for regulatory intervention at their next triennial valuation unless they pay more into their schemes.”
It points out that 22 per cent of FTSE 350 companies with a DB pension scheme are paying over 5x more in dividends than pension contributions, despite contributions at this level taking over eight years to pay off the IAS19 deficit.
“Companies should ensure they get value from any increased spend and avoid the risk of trapped surplus. I expect to see more contingent contribution structures and escrow funding, and in some cases cash injections in return for transferring the scheme in to a commercial consolidator.”
He adds that funds with an IAS19 surplus should prioritise end-game planning. “Companies that have an IAS19 surplus should look for opportunities for risk transfer and ultimately removing the DB scheme from their balance sheet.
“To be able to achieve this the first step is to set a long term objective that takes account of both improved insurer and emerging consolidator pricing.
“Contributions from cash, investment returns, opportunistic buy-ins, time and member options can then be established, giving a clear path for ultimate risk transfer. Many will find that they are closer than they think to getting their pension scheme off balance sheet when they take this approach.”
