New analysis by Lane Clark & Peacock (LCP) shows that as many as 15 FTSE 100 companies will be able to offload their UK defined benefit pension schemes in the next three years.  

Although to date few FTSE 100 companies have chosen to move their pension plans in their entirety to an insurer through a full pension buy-out, there are already clear signs of an acceleration of FTSE 100 companies transferring their UK defined benefit pension plans in this way.  

LCP’s analysis of the funding position of the FTSE 100 UK pension plans reveals:

• As many as five FTSE 100 companies have already either closed the shortfall in assets to full buy-out or are not far away from doing so (including Rentokil Initial which announced a £1.5bn full buy-out in December 2018 with surplus assets remaining).
• How quickly FTSE 100 companies will be able to close the remaining shortfall to full buy-out depends on the extent to which buy-out pricing remains at current levels, whether companies continue making significant pension contributions and the future investment performance of their pension scheme assets.
• If current deficit contribution levels of c£7bn per year continue, there will likely be a huge increase in FTSE 100 companies who can afford to remove their pension obligations through a full buy-out transaction – as many as 15 companies are projected to reach, or be close to, full buy-out in the next three years, a further 9 companies through 2025, and a further 16 by the end of 2028.
• In total over the next decade, up to 40 of the FTSE 100 companies with UK defined benefit pension plans are likely to either reach, or be close to, full buy-out, equating to £300bn of pension plan liabilities – just under half of the total UK liabilities for the FTSE 100.
• Even if FTSE 100 companies slash deficit contributions to zero on the back of improved funding levels, an additional 12 FTSE 100 companies are projected to be able to afford full buy-out over the next 10 years.

So far, the total volume of full buy-out of FTSE 100 companies’ UK pension plans to insurers amounts to no more than £5bn out of nearly £800bn of legacy defined benefit UK pension liabilities across the FTSE 100. The two most high-profile transactions to date have been Rentokil Initial, which announced a £1.5bn full buy-out in December 2018, and Rolls-Royce, which announced a £1.1bn full buy-out in November 2017.

Since the immediate aftermath of the EU referendum in 2016, the average FTSE 100 company has seen affordability for a full buy-out increase significantly, with the aggregate funding shortfall reducing by 30% to c£200bn since August 2016. This improvement has been driven by good asset performance, falling life expectancies and strong price competition between insurers.

Charlie Finch, partner at LCP, commented:

“Our prediction of a record year for buy-ins and buy-outs on the back of improved funding positions has clearly come to pass, with total volumes exceeding £20bn in 2018. This has smashed through the previous record of £13.2bn set in 2014.

“Our projections show UK defined benefit pension plans reaching a new stage in their journeys. To date, very few FTSE 100 companies have offloaded their pension plans in full to an insurer, but an increasing number will be able to do so over the next few years. This would mark the final phase in the move away from final salary pension plans.

“When it comes to companies and trustees getting on top of their pension plan risks and liabilities, 2019 promises to be another bumper year. Buy-in and buy-out activity is at record levels and while market volatility – and potential shocks such as a no-deal Brexit could throw de-risking plans off course, there is a clear direction of travel.  The market is showing no signs of slowing down.”