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The Actuary The magazine of the Institute & Faculty of Actuaries

Pension deficit more than trebles for UK’s biggest listed firms

The combined accounting deficit of defined benefit (DB) pension schemes for FTSE350 companies more than trebled from £39bn at the end of 2015 to £137bn on 30 December 2016 according to consultancy firm Mercer.

Pension deficits increase again ©iStock
Pension deficits increase again ©iStock

Their Pensions Risk Survey shows that at the end of last year, the UK’s biggest firms’ asset values were £720bn, while their liabilities were valued at £857bn, compared to the previous year when assets were worth £634bn and liabilities were £673bn.

This is thought to be due to pension deficit contributions and positive asset returns being offset by a fall in corporate bond yields and rising inflation expectations caused by unexpected political events like the Brexit vote and election of Donald Trump.

Mercer senior consultant, Le Roy van Zyl, said: “Pension scheme trustees and sponsors face the new year with significant uncertainty.

“Brexit is likely to move beyond a mere intention, and the effect of new leadership in the US will become clear - not to mention other major events such as the French presidential elections.”

“If we look at how volatile conditions have been, and how volatile they may well continue to be, schemes will have to be responsive on a variety of issues.

“In this environment, best outcomes will be achieved by tackling covenant, funding and risk management together. It will be especially important to focus on future cash-flow requirements in different scenarios.”

This latest data relates to around 50% of all UK pension scheme liabilities and is compiled using the same approach that companies adopt for their corporate accounts, which is refreshed at the end of each year.

It shows that the DB pension deficit for FTSE350 companies increased by £10bn between November and December in 2016, despite the FTSE100 index ending the year on an all-time high.

Mercer UK DB risk leader, Alan Baker, said: “After a very challenging year, pension deficits increased again, and end the year more than three times higher than the end of 2015 at £137bn.

“This continues to put real pressure on any risk management plans and will require trustees and corporate sponsors to work closely together to establish the right framework to monitor and manage those risks."