FTSE350 firms spend more on DC than DB
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Companies with a defined benefit scheme paid more into defined contribution than DB schemes for the first time ever, a consultancy says in a new report. It also found DB surpluses in company accounts are driven mainly by changes in life expectancy.
A WTW analysis of annual reports published by FTSE 350 companies with 31 December year-ends found that companies sponsoring DB plans contributed a combined £6.6bn to UK DC plans in 2023, compared with £5.1bn to DB.
“Some companies have been able to switch off deficit contributions, and 2023 did not see the big one-off cash injections reported in some earlier years,” explained Bina Mistry, head of UK corporate pensions consulting at WTW.
The change was further driven by the fact more employees are in DC plans and higher interest rates pushed down the cost of funding, which fell by almost half between 2021 and 2023.
“Cheaper accrual also helps explain why no employers in this analysis closed their DB schemes to existing members in 2023 – the first closure-free year in two decades,” Mistry added.
She said that “as DC increasingly becomes ‘where the money goes’, we need more attention on how to deliver the best balance of risk and return, and on how to support members seeking to make a pot of ever-changing size last over a retirement of uncertain length”.
Lower life expectancy assumptions drive down cost of DB
A change in DB liabilities is often associated with higher* gilt yields, but WTW says 2023 also saw the biggest ever year-on-year fall in expected lifespan for newly retired pensioners. Men aged 65 were on average assumed to die aged 86.7 years, down from 87.1 in 2022. Women were expected to live to 88.5 on average, down from 88.9.
These numbers have been declining since 2014, notes WTW, saying DB liabilities would be around 7% higher if companies had used 2014 mortality assumptions in 2023 and beyond. With aggregate funding levels now at 109%, WTW says this change in actuaries’ assumptions “can explain the lion’s share of pension surpluses in these companies’ accounts”.
Mistry said the bigger change between 2022 and 2023 could reflect companies initially waiting to revise down their assumptions and then doing so once they had more data.
“Mortality experience in 2024 has so far been similar to 2014. Because improvements anticipated a decade ago did not materialise, companies are projecting forward from a lower starting point and taking a gloomier view about what will happen next,” she said.
A recent update to the Continuous Mortality Investigation’s projections model, which employers use to set life expectancy assumptions, should lead to a further small fall in life expectancy in December 2024 accounts, she noted.
“However, this is very sensitive to beliefs about how much weight to put on experience in the couple of years after the pandemic. Companies looking [to] move pension liabilities off their balance sheets may find that insurer pricing anticipates longer lifespans,” she warned.
How would higher minimum contributions for auto-enrolment affect companies?
*This article has been amended to state that gilt yields are higher
*This article has been amended to state that gilt yields are higher
