More than half of defined benefit funds sponsored by FTSE 350 companies are now cash flow negative, shows new research by consultant Hymans Robertson.
The firm's eighth annual Pensions Analysis Report, published Tuesday, shows that 57% of these funds are now paying out more than they are receiving through contributions. That proportion has increased from 50% last year.
One of the factors behind the increase is of participants cashing in DB funds after a rule change in April 2015, so-called pension freedoms. Another factor is that these funds have seen an almost 15% drop in the benefits being earned due to the freezing of the pension funds.
The research found that these elements have more than outweighed a £2 billion ($2.4 billion) increase in cash contributions by sponsoring employers, up to more than £16 billion from almost £14 billion last year.
If cash-flow-negative pension funds “don't have clear income-generating strategies in place, they run the very real risk of becoming forced sellers of assets to meet pension payments,” said Jon Hatchett, partner and head of corporate consulting at Hymans Robertson, in a statement accompanying the research.
Mr. Hatchett said the U.K. Pensions Regulator has flagged the importance of cash flow planning for the first time in its 2016 Annual Statement — a guide to pension fund trustees. “This is an approach we've advocated for some time, and it's one that schemes need to turn their attention to as a matter of urgency,” he added.
Mr. Hatchett said pension funds in a cash-flow-negative position need to invest in income-generating assets and to ensure they have hedging assets in place against interest rates and inflation.
In separate analysis, JLT Employee Benefits said the total deficit of all U.K. corporate pension funds fell 11.1% to £447 billion in October. For the year ended Oct. 31, deficits jumped 92.7%. The funding level improved over the month to 76%, from 74% as of Sept. 30; but fell from 84% as of Oct. 31, 2015.
For FTSE 350 companies, the total pension fund deficit fell 6.2% to £197 billion, and the funding level remained steady at 77% during October. Over the year ended Oct. 31, the deficit grew 146.3%, and the funding level fell from 88%.
