Defined benefit (DB) scheme sponsors paid more into their defined contribution (DC) schemes than their DB plans for the first time ever in 2023, research from WTW has found.

According to the analysis, FTSE 350 companies paid a total of £6.6bn to UK DC plans in 2023, compared with £5.1bn to their DB plans, marking the first time that DC spend has exceeded DB spend amongst DB sponsors.

WTW head of UK corporate pensions consulting, Bina Mistry, explained that some DB sponsors have been able to switch off deficit contributions, while higher interest rates have pushed the cost of DB accrual "right down", falling 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," she explained.

In addition to this, the research showed that life expectancy changes explain the "lion's share" of pension surpluses in company accounts, after 2023 saw the biggest ever year-on-year fall in expected lifespan for newly retired pensioners.

According to the analysis, 65- year-olds were on average assumed to live five months less long, compared with 2022 disclosures.

In particular, male scheme members aged 65 were on average assumed to die aged 86.7 years, down from 87.1 in 2022, while women were expected to live to 88.5 on average, down from 88.9, with both in decline since 2014.

However, the analysis showed that using the assumptions about mortality rates in 2023 and beyond that underpinned their 2014 disclosures would increase the present value of pension liabilities by around 7 per cent.

Given this, Mistry suggested that the change between 2022 and 2023 may partly 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," she continued, stating: "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.

“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. 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 the move pension liabilities off their balance sheets may find that insurer pricing anticipates longer lifespans.”

Mistry also noted that while DB sponsors historically had the challenge of explaining a “large and volatile hole” on their balance sheet, now it is more about communicating whether the company expects to benefit from the net assets, as nearly two thirds (61 per cent) of companies recorded a surplus on their balance sheet.

WTW said that where pension risk is transferred to a third party, some companies might seek in advance to publish supplementary numbers to strip out any distorting effect on key metrics and to explain further the benefits of such transactions versus the value of balance sheet surpluses.

“Where the aim is to transfer assets and liabilities to an insurer, the way this affects key financial metrics such as profit and loss (P&L) can depend on the circumstances surrounding the transaction, and some directors may want to publish in advance alternative metrics and encourage investors to look through any distorting effects on their headline results,” Mistry explained.

“Where the aim is to run the scheme on in pursuit of further surpluses, companies may need to explain what they have agreed with trustees about how and when any surpluses will be shared out especially in circumstances where these may lead to P&L losses, for example when granting discretionary increases.”

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