FTSE 350 final salary scheme “will cease” by 2027

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06 Dec, 2017

FTSE 350 final salary scheme “will cease” by 2027

FTSE 350 firms will not close a final salary pension scheme until 2027, according to a new report.

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 payment scheme either open to both new members and future accrual or just open to future accrual. Still, increased scrutiny and monetary demands on sponsors, particularly from The Pensions Regulator (TPR), will leave the door shut. This will be a particularly difficult problem due to the last two years of British Steel issues, according to the 350 pension analysis.

The analysis from Hymans Robertson, said trustee demands, driven by this regulatory pressure, would cause the closures, according to Head of corporate consulting Jon Hatchett.

"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 cautionary tale comes after TPR stepped up its enforcement action this year, telling firms it will scrutinise the ratio of dividend payments to deficit recovery contributions (DRCs) more closely, and that it will use its section 231 power to set a schedule of contributions for the first time, with more in the works.

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.

Nonetheless, the slide in yields will see the number of closed schemes grow over the next decade, Hatchett predicted, etched forward due to a 40% or 50% increase in future service contributions.

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 showed in its Purple Book 2017 that just 12% of private sector DB schemes - including those outside of the FTSE 350 - remain open to new clients, while 61% remain open to new accrual.

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