The average time to buy-out for the FTSE350 Defined Benefit (DB) pension scheme falls to one-year low in March as increased gilt and swap yields reduce the liability values.
According to Barnett Waddingham’s DB End Gauge analysis, the average time to buyout for the FTSE350 DB pension schemes fell by nine months over March 2022. This means the average scheme is on track to reach its endgame target in 9 years and 9 months, taking the time to buy out to a 12-month low.
The significant fall in the index follows successive rises over January and February 2022 – analysis showed a 6 month rise over this period – leaving the index at 10.6 years at the end of February.
The decrease recorded over March was driven by an increase in gilt and swap yields over the period which reduced the value placed on the pension schemes’ liabilities. This improvement in funding position was moderated somewhat by a fall in total asset values and an increase in expectations of future inflation.
Simon Taylor, Partner at Barnett Waddingham, said: “Short-term inflation continued to rise during March, with the UK CPI inflation rate hitting a 30-year high of 7%. However, long-term expectations of future inflation remained broadly stable and so had little impact on the index.
Short-term high inflation does, however, accelerate the expected pace of monetary tightening needed to keep this under control. The Bank of England raised the base rate to 0.75% in March and markets now expect the base rate to rise at least 2% by the end of 2022. Thus far, expectations of tighter policy have had a positive impact on the index, fuelling a rise in gilt yields and decreasing the FTSE350’s total DB liabilities by around 3%.
“However, it’s a delicate balancing act and the major risk remains a policy error in which central banks tighten policy either too slowly, allowing inflation to remain elevated, or too quickly, risking a recession.
“As with all investments, it is important to take a long-term view; whilst it is vital to monitor movements in funding levels, journey plans should not deviate unless there is evidence of a fundamental change.”