Commenting on news that FTSE350 defined benefit pensions are enjoying a decade-long surplus on an accounting basis, Edd Collins said many companies may be emerging from the Covid-19 pandemic in the "unusual" position of not having the pension eating a hole in their balance sheet.
While this may be mostly a result of economic factors, he also said: "Unanticipated deaths of, mostly older, pension scheme members in 2020 have had a marginal impact on company balance sheets, perhaps reducing liabilities by 0.1-0.2 per cent."
However, he said it was far too early to say whether Covid's knock-on effects could alter mortality rates significantly, as "companies regard it as too early to take a firm view on that".
He explained: "Life expectancy assumptions had been gradually falling since 2014, as anticipated improvements have failed to materialise.
"The much larger number of extra deaths seen in 2020 will not feed into future expectations in the same way because the pandemic is viewed as a one-off event rather than a feature of a typical year."
A much more common way for companies to preserve cash has been to reduce dividends.The life expectancy numbers disclosed in companies’ accounts barely changed in 2020. The average life expectancy reported for men aged 65 was 87.1 years (down from 87.2 in 2019). For women, it was 88.9 (up from 88.7 in 2019).
Although "unanticipated deaths" may have improved liabilities by a fraction, he said economic factors, such as reducing dividends and market strength, would have had a far greater impact on improving the scheme sponsor's balance sheet.
In fact, as of 18 May, the aggregate pension surplus for the FTSE350 was estimated at £30bn (a funding level of 104 per cent).
Analysis by the consultancy of 94 FTSE350 companies, which sponsor DB schemes and had a financial year ending on December 31, found:
- An estimated 74 per cent of these companies made deficit contributions in 2020.
- This was down from 80 per cent in 2019.
- Where deficit contributions were made, the median amount paid in 2020 was estimated at £15m.
- This was an increase of 8 per cent on 2019.
- In 2019, only 8 per cent of companies paying deficit contributions paid less to shareholders than to their pension scheme.
- In 2020, that rose to 43 per cent.
Collins explained: “Some companies will be emerging from the pandemic in the unusual position of not seeing their pension scheme creating a hole in their balance sheet.
“Pension deficits briefly turned into surpluses at the start of the pandemic. When market turmoil sees investors shun corporate bonds, the rise in interest rates (yields) can make the pension liabilities recorded in company accounts look smaller.
"That proved fleeting, but this year has seen a more sustained improvement, with liabilities falling more sharply than asset values during the first few months of 2021."
The consultancy highlighted that, in 2020, it was normal for companies to respond to cash-flow pressures by reducing dividends but not contributions to DB schemes.
Collins added: "Deficits are measured differently when it comes to negotiating funding agreements with pension scheme trustees. Recent experience has been positive here, too – albeit with some variation from scheme to scheme.
"That may reduce the cash injections needed for schemes to continue their de-risking journeys – though, with the pandemic illustrating the risks schemes face, some trustees may seek to go further and faster in making pension benefits secure.”
Early in the pandemic, the Pensions Regulator said trustees could allow cash-strapped employers to pause the deficit contributions they had signed up to, though with strict conditions to stop resources draining out of vulnerable companies.
Willis Towers Watson said while TPR claimed only 3 per cent or 4 per cent of schemes had used this facility by October 2020, there has been a drop in the aggregate value of FTSE350 deficit contributions, from £4.9bn to £4.5bn.
Collins added: “A much more common way for companies to preserve cash has been to reduce dividends. As corporate revenues recover, some companies may argue that keeping pension payments steady and allowing dividends to vary applies equally in good times as well as bad.”
simoney.kyriakou@ft.com
