Companies in the FTSE 350 could save £15bn in defined benefit (DB) pension deficit contributions by selecting the bespoke route under The Pensions Regulator’s (TPR) proposed DB Funding Code, according to Hymans Robertson.

The consultancy’s annual FTSE 350 DB Report stated that 40 per cent of FTSE 350 companies should consider choosing the bespoke funding strategy and could save £15bn relative to fast-track costs.

Meanwhile, the remaining 60 per cent were found to be sufficiently well-funded to comply with the fast-track route.

TPR has proposed the Funding Code to consist of a ‘twin-track’ approach, whereby sufficiently well-funded schemes can adopt a fast-track funding strategy, while schemes with funding strategies that may not be compliant with the new code can opt for a bespoke route.

Hymans Robertson urged companies to start considering and preparing for the route they will take as a priority, and to “seriously consider” whether the bespoke route is a viable option.

“The new regime is expected to go live in late 2022 or early 2023,” commented Hymans Robertson head of corporate DB, Alistair Russell-Smith.

“We looked at how many FTSE 350 schemes are already sufficiently well-funded to comply with fast track with their existing strategy, finding that 60 per cent are in a position to do this. We believe the remaining 40 per cent should consider a bespoke strategy to reduce cash costs, potentially supported by provision of security to the pension scheme.

“The end of 2022 may seem a long time away, but corporates really need to start considering now if they will adopt a fast-track or bespoke funding strategy, as it will have a fundamental impact on valuation approaches. Those in a position to comply with fast track can be relatively unfazed by the new funding regime, and should instead be prioritising their endgame strategy and the most efficient way to run off the scheme or get it off balance sheet.

“However, existing strategies fall short of fast-track requirements for 40 per cent of FTSE 350. These companies should instead be considering a corporate driven bespoke strategy.

“Without a corporate driving the strategy these schemes might default to fast track. But this outcome would increase annual cash costs relative to current levels by 150 per cent.

“In contrast, a bespoke strategy could reduce current cash costs. We estimate this route could collectively save as much as £15bn of deficit contributions for FTSE 350 DB Schemes relative to fast-track costs, actually reducing current levels of annual cash costs by 15 per cent.

“If this can be achieved with provision of security or other covenant enhancing measures to the pension schemes then these lower levels of contributions can still improve member security.”

Hymans Robertsons’ report also revealed that the aggregate IAS 19 funding position of FTSE 350 DB schemes shifted from a £30bn deficit in August 2020 to an £80bn surplus in August 2021, while aggregate pension contributions remained unchanged at £13bn a year.

Russell-Smith added: “It is reassuring for pension scheme trustees to see that aggregate pension contributions did not reduce last year, despite a 30 per cent drop in corporate earnings. This provides further evidence that most of the FTSE 350 are well placed to support their DB schemes, retaining contribution levels even when grappling with a major risk event like the Covid-19 pandemic.”

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