The combined accounting deficit of defined benefit (DB) pension schemes at the UK's 350 largest listed companies has increased by £13bn in one month, new data from Mercer shows.
The consultancy firm's figures show that the FTSE 350 pension deficit rose from £90bn at the end of June to £103bn on 31 July, which was driven by falling bond yields.
Liabilities increased from £957bn to £970bn during that time, while asset values remained unchanged at £867bn.
Charles Cowling, chief actuary at Mercer, highlighted how sponsoring employers are facing various financial challenges brought on by COVID-19, and warned that the global economic outlook “remains bleak”.
“In the UK, many sectors are still operating in crisis mode and some experts predict it will be 2024 before the UK economy returns to normal,” he continued.
“Meanwhile, the economy is expected to shrink by over 10% this year due to the winding down of the furlough programme and unemployment could get close to 10% by year end.
“These are testing times for trustees who, more than ever, need to understand the financial challenges facing sponsoring employers.”
Mercer's data relates to about 50% of all UK pension scheme liabilities, with analysis focused on deficits calculated using the approach companies adopt for their corporate accounts.
Aggregate liabilities for the FTSE 350 have risen substantially in less than two years, increasing from an estimated £788bn on 31 December 2018, with assets also rising from £747bn.
Cowling said that focus will turn to the Bank of England this week as it meets to review interest rates, and urged pension trustees not take unnecessary risks.
“Although a change to base rates is unlikely, it seems that markets are already pricing in a cut to negative rates and the bank is expected to publish a report on the prospect of negative rates,” he explained.
“Now is not the time for pension trustees to be increasing investment risk. Rather, where possible, trustees should consider reducing risk, taking market opportunities to increase hedging programmes and contemplate lower risk contractual cash flow matching investments.”
Author: Chris Seekings
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