More than a third of FTSE 350 companies' defined benefit pension schemes are fully funded, setting up a potentially huge windfall for the companies concerned says consultant Barnett Waddingham.
“After a transformative 2022, the funding levels of the FTSE 350 DB schemes have remained resilient over the last year, with around 35% of schemes estimated to be fully funded on a buyout basis on 31 May 2024," said BW.
On a buyout basis, that represents liability values of around £175bn or three times the bulk annuity business written in 2023 (£49bn), it adds.
BW estimates that a further 20% of FTSE 350 DB schemes are expected to reach full funding on a buyout basis over the next three years, representing additional liability values of around £140bn.
”This illustrates the potential scale of the demand for bulk annuity transactions over the coming years,” it said.
BW notes that the reappearance of DB scheme surpluses has ignited a debate about the economic value they hold and how this should best be deployed.
The traditional option for well-funded schemes has been to transfer the responsibility for benefit payments to an insurance company via a bulk annuity transaction, it says.
This sees security for members and reducing risk for the sponsoring employer in return for a large premium payment.
BW expects this option to remain popular but adds there is a growing recognition that a bulk annuity transaction results in an irreversible flow of economic value from the scheme to the insurance company.
If all of the FTSE 350 DB schemes were transferred to the insurance market on 31 May 2024, around £125bn of economic value would be passed over to insurance companies.
“If instead, this were shared over time between members and sponsors then it could be a boon for UK PLC, the taxman and workers alike.”
Lewys Curteis at BW, said: “The reversal in the fortunes of the UK’s DB schemes has had a seismic impact on the pension risk transfer market, and we are likely to see the demand for bulk annuity transactions stretching the resources of the insurers for some time (even with new entrants coming into the market).
“At the same time, we are seeing an increasing number of schemes assessing the potential benefits of pursuing a run-on strategy, with a view to releasing previously trapped economic value for the benefit of members and sponsoring companies.”