FTSE 350 final salary schemes will cease by 2027

James Phillips reports...

No FTSE 350 companies will retain a final salary pension scheme open to accrual by 2027, analysis by Hymans Robertson finds.

The cost pressures associated with running these defined benefit (DB) schemes will inevitably mean companies will give up on trying to keep up with growing liabilities.

Currently, just 45% of FTSE 350 companies continue to operate a final salary scheme either open to both new members and future accrual or just open to future accrual. Yet, increased scrutiny and financial demands on sponsors, particularly from The Pensions Regulator (TPR), will cause the doors to be shut.

This will be particularly acute following the last two years’ BHS and British Steel problems, the FTSE 350 Pensions Analysis said.

Hymans Robertson head of corporate consulting Jon Hatchett said trustee demands, driven by this regulatory pressure, would cause the closures.

“Following the resolution of the BHS and Tata Steel pension cases, TPR is now taking a tougher line of DB funding,” he said. “The upshot is companies will be under greater pressure from trustees, with the backing of the regulator, to pay more cash towards deficits.

“We’ve seen a pendulum swing away from the recognition that a strong employer is better able to support its pension scheme, to an expectation of annual deficit contributions increasing when schemes are behind plan.”

The warning comes after TPR stepped up its enforcement action this year, both telling companies it will scrutinise more closely the ratio of dividend payments to deficit recovery contributions (DRCs) and using its section 231 power to set a schedule of contributions for the first time, with more in the pipeline.

Hatchett said the regulator was focusing on the wrong areas and should not be so simply averse to long recovery plans.

“The focus on DRCs is too simplistic,” he continued. “Worse, it creates an incentive to take more investment risk at a time when for many maturing schemes these risks should be dialled down.

“The prevailing sentiment that ‘longer recovery periods are bad’ should be challenged. A longer recovery period, with a plan that has a greater chance of achieving its targets, can be better for employers and scheme members.

Nevertheless, the fall in yields will see the number of closed schemes soar over the next decade, Hatchett predicted, sped up by required future service contributions increasing to 40% to 50% of pay.

He concluded: “This coupled with the pressure to increase DRCs will lead to even more companies taking further action to reduce costs and closing to future accrual. If we project the current trend forward, we expect future accrual to be switched off altogether in the FTSE 350 by 2027.”

Hatchett’s comments came as the Pension Protection Fund revealed in its Purple Book 2017 that just 12% of private sector DB schemes – including those outside of the FTSE 350 – remain open to new members, while 61% remain open to new accrual.