For the first time, companies sponsoring defined benefit (DB) plans paid more into defined contribution (DC) pension plans than into their DB arrangements, according to a report from WTW.
WTW pointed out that for much of the last decade, companies have sought to plug pensions deficits by making considerable deficit reduction contributions (DRC). In 2021 and 2022, with the start of improvements in funding, this behaviour started to reverse.
WTW’s analysis of annual reports published by FTSE 350 companies with 31 December year-ends showed that in 2023 companies have been “reaping the rewards” of improvements as DB deficit payments declined steeply, falling from a total of £6.6bn to £3.6bn and the cost of accrual fell from £2.4bn to £1.5bn.
Meanwhile, contributions to DC plans continued their long-term trend upwards, driven by growth in wages and membership, totalling £6.6bn in 2023. WTW said that over a two-year period, these contributions have grown by 30%.
Bina Mistry, head of UK corporate pensions consulting at WTW, said: “This is the first time that DC spend has exceeded DB spend amongst DB sponsors.
“As DC increasingly becomes ‘where the money goes’, we need to see more attention on how to deliver the best balance of risk and return, and how to support members who need to make a pot of ever-changing size last over a retirement of uncertain length.”
Improvements in funding
Life expectancies disclosed for scheme members peaked in 2014 – 88 years for men aged 65 and 90 for women aged 65 – and since that time have largely trended steadily downwards.
According to the research, 2022 saw a pause in this trend, however, WTW said there was a further fall in life expectations by around 5 months to 86.7 years for males and 88.5 years for females. This reduced liabilities by around 1.5% and 2%.
Life expectancies are now at their lowest level for a decade, but in 2014 were expected to continue to grow upwards. WTW pointed out the expectations today are around 2 years lower than would have been anticipated in 2014. This worsening of longevity assumptions has reduced liabilities by around 7% over the last decade.
WTW expects the falling assumptions of life expectancy make up the “lion’s share” of FTSE 350 funding level which sits at 109%.
Charles Rodgers, head of UK pension accounting at WTW, said: “Disclosed liabilities would be around 7% higher if companies had used the same assumptions about mortality rates in 2023 and beyond that they were using in 2014 – before a ‘lost decade’ of mortality improvements.
“This would be enough to wipe out the lion’s share of the aggregate surplus in these companies’ accounts.”
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