Pension deficits turned into surpluses at the start of pandemic, says WTW

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Edd Collins, a senior director at Willis Towers Watson (WTW), said that at the start of the pandemic last year pension funds’ deficits briefly turned into surpluses.

He said: “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.”

According to the consultancy, FTSE350 companies’ defined benefit (DB) pension schemes have been in surplus, on aggregate, on almost every day this year. This represents the longest sustained period of accounting surpluses for more than a decade, it added.

On 18 May, the aggregate pension surplus for the FTSE350 is estimated at around £30bn – a funding level of 104%.

“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,” he explained, adding that this year has seen a more sustained improvement, with liabilities falling more sharply than asset values during the first few months of 2021.

“Deficits are measured differently when it comes to negotiating funding agreements with pension scheme trustees,” Collins said. There can be some variation from scheme to scheme and that could reduce cash injections needed for schemes to continue their de-risking journeys, he said.

WTW’s latest research shows that – looking into 94 FTSE 350 companies that sponsored DB schemes and had a financial year that ended on 31 December – an estimated 74% of these companies made deficit contributions in 2020, down from 80% in 2019.

Where deficit contributions were made, the median amount paid in 2020 was estimated at £15m, up 8% on 2019.

Collins said: “Early in the pandemic, The Pensions Regulator (TPR) 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.”

According too TPR, only 3% or 4% of schemes had used this facility by October.

There has, though, been a slight drop in the aggregate value of FTSE350 deficit contributions, from £4.9bn to £4.5bn. This may reflect a few firms in hard-hit sectors making bigger changes while most companies continued paying what they had agreed to, WTW noted.

“A much more common way for companies to preserve cash has been to reduce dividends,” Collins said. In 2019, only 8% of companies paying deficit contributions paid less to shareholders than to their pension scheme. In 2020, that rose to 43%.

Collins said that 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”.