- Pension deficit for FTSE 350 companies increases by £16bn in August to £67bn
- Liabilities increased by £30bn due to a 0.3% fall in corporate bond yields
- Increasing likelihood of no-deal Brexit has led to a surge in the deficit, making it vital for trustees to effectively monitor and manage risk
Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased by £16bn, from £51bn at the end of July to £67bn on 30 August. The quoted funding level fell from 94% to 93%. During the period, liability values increased by £30bn to £914bn compared to £884bn at the end of July due to a 0.3% fall in corporate bond yields. Correspondingly, asset values increased by £14bn from £833bn at the end of July to £847bn.
Maria Johannessen, Partner and Corporate Consulting Leader in Mercer’s Wealth business, said: “August saw the largest monthly increase in the deficit in 2019, bringing it to highs unseen for nearly two years. Under-hedged schemes took the lion’s share of the deficit hit. The overall increase was largely driven by a reduction in corporate bond yields, which meant that liability values increased by over 3% in just one month. As political uncertainty is likely to escalate, stakeholders need to take an active approach to monitoring the funding position and spotting opportunities to manage risks.”
Charles Cowling, Actuary at Mercer, added: “Following Prime Minister Boris Johnson’s decision to prorogue Parliament, a no-deal Brexit on 31 October looks increasingly likely. Facing a potential sterling crisis and a spike in inflation, trustees and sponsors would be wise to prepare for political volatility and very difficult financial markets. Combined with downward pressure on interest rates, as President Trump increases pressure on the Federal Reserve to cut rates far more aggressively, the months ahead could see serious implications on scheme finances and risk.
“Trustees will also be looking nervously at to see how employer covenants are affected by a no-deal Brexit. Against a very uncertain backdrop, trustees will have real challenges in making effective decisions. It’s important that they examine the risks they are taking and work through various scenarios to establish whether their schemes face material dangers. In particular, trustees should look at the investment risks they are running. Many schemes should consider putting in place pragmatic mitigating measures and investment de-risking at the earliest opportunity.”
Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.
