The contributions paid by FTSE 350 defined benefit (DB) pension scheme sponsors into defined contribution (DC) schemes surpassed those paid into DB schemes for the first time in the year to 31 May 2024.

Analysis by Barnett Waddingham showed that, in the 12-month period, sponsor contributions of £8.1bn were paid into FTSE 350 DB schemes, consisting of £4.7bn of deficit contributions and £3.4bn of DB pension accrual contributions.

Meanwhile, FTSE 350 DB scheme sponsors paid £9.9bn into DC schemes during the same period.

This ‘historic shift’ was driven by the increase in government bond yields over recent years, which has improved DB schemes’ funding positions and reduced the cost of DB benefit accrual.

Improved funding levels have resulted in sponsors paying less in deficit recovery contributions, with the £4.7bn paid by FTSE 350 companies over the year being the lowest level for a decade and just over half the figure paid in the preceding 12 months.

Barnett Waddingham also found that around 33 FTSE 350 companies could fund more than five years of DC contributions from their existing DB surplus, with over half of these potentially able to fund DC contributions for a decade or more.

The consultancy said that, given the concerns in the industry about the adequacy of DC contributions, the potential introduction of DB surplus extraction rules could represent a “real opportunity” for companies to improve the pension outcomes of their employees by paying higher DC contribution rates.

“The contribution data signals a decisive moment in the pension industry,” commented Barnett Waddingham principal, Lewys Curteis.

“While DC has been the preferred form of pension benefit in the private sector for many years, it is only this year that DC contributions have exceeded DB contributions for the FTSE 350 DB scheme sponsors.

“To be clear, this is the consequence of a large fall in DB contributions, reflecting the material improvement in funding positions and the reduction in the cost of DB pension accrual, rather than a step up in the level of DC contributions being paid.

“Concerns about DC pension adequacy remain, with the level of contributions generally considered to be too low to support good member outcomes.

“The reduction in DB pension costs and the emergence of DB scheme surpluses could provide companies with the means to redress this imbalance without materially impacting the bottom line.”

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