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December 2019

UK Pensions Trends: Are You Keeping Up With Your Peers?

2018 Review of FTSE 350 Defined Benefit Pension Schemes

Each year, GSAM’s Pensions Solutions team perform a comprehensive review of the defined benefit pension schemes of every company in the FTSE 350, based on information provided in their annual report and accounts.

We have been running this survey since 2011 and it covers the 170 defined benefit pension schemes in the index, with assets ranging from £100 million to above £5 billion.

If you would like to discuss the below trends and drivers behind them in more detail, please click here to get in touch with the team.

The team focused their analysis in three key areas and identified the below key themes:

  1. Funding level improvements… on paper?
    • FTSE 350 company pension scheme accounting measure funding levels have been trending up for several years.
    • Over 2018, asset returns were broadly flat. Therefore this improvement was predominantly due to the rise in credit spreads which caused accounting liabilities to fall. Credit spread moves accounted for nearly 3% of the 5% improvement over the year.
    • Longer-term, looking at a low risk basis, such as Gilts + 0.5% we estimate that funding dispersion is wide with almost 50% of schemes 90% or better funded on this “self- sufficiency” measure. Looking through this dispersion reveals that better funded schemes tend to be bigger and supported by a stronger covenant with the opposite true for less well funded schemes.

FTSE350 Aggregate Assets, Liabilities and Funding Level Over Time

Source: GSAM Global Portfolio Solions, company annual reports as of September 2019.

  1. Meaningful changes to asset allocation accelerated
    • There is a clear multi-year trend of pension schemes de-risking over time with equity allocations consistently decreasing in favour of other assets such as bonds and property. This is visible in the FTSE350 data but also other industry data sources.
    • Since 2008, we estimate that for FTSE350 company pension schemes, around £150 billion of assets have been disinvested from equity markets with smaller schemes making the biggest percentage change in exposures.

Allocation to Equities by Scheme Asset Size

Source: GSAM, company reports and accounts

    • Schemes from £100 million to £1 billion appear to be the biggest consumers of buy-ins, likely due to schemes below £100 million being less able to de-risk and bigger schemes above £1 billion having more resources to remain invested to eventually run-off while being self-sufficient or target a later, large buy-out.
    • Recent trends appear to show increased amounts of buy-in and in increasingly bigger deals. As of the close of 2018, four of the largest 10 buy in and buy out deals were struck in 2018. As of October 2019, six of the largest 10 deals were completed in 2019 illustrating the ramp up in size of transaction.
    • Despite the high face value of recent numbers, buy-in and buy-out activity remains a very small proportion of overall UK DB scheme assets.

Buy-in and Buy-out Activity

Annuity purchase activity has picked up after significantly... 

Buy-in and Buy-out Activity vs Purple Book Assets

…but remains a small proportion of the overall market 

Source: GSAM Global Portfolio Solutions and Professional Pensions, as of September 2019. LCP pensions de-risking report: Buy-ins, buy-outs and longevity swaps as of March 2019. Note 2019 annuity purchase is an estimate. PPF Purple Books

  1. Cashflow positive schemes are a rare breed
    • The number of cashflow negative schemes in the FTSE350 has increased from 61% in 2012 to 83% in 2018.
    • This is not surprising given the general trend of maturing membership profiles and the impact of pension freedoms since 2016 resulting in increasing benefit payments relative to contributions which have remained broadly flat over time.
    • This trend of increasing cashflow negativity is also evident from the rising number of cashflow driven investment products (historically the domain of insurance providers) now becoming available for pension schemes.

FTSE350 Cashflow Positions – 2018

Source: GSAM, company reports and accounts, as of December 2018.

In the chart above each dot represents a scheme. The vertical axis shows contributions as a percentage of assets while the horizontal axis shows benefit payments as a percentage of assets. Schemes below the diagonal line have more cash leaving the scheme than coming in and are therefore in a cashflow negative position.

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UK Pensions Trends: Time To Fix The Roof

Each year, GSAM’s Pensions Solutions team perform a comprehensive review of the defined benefit pension schemes of every company in the FTSE 350, based on information provided in their annual report and accounts.

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