The accounting deficit of defined benefit (DB) pension schemes at the UK's 350 largest listed companies nearly doubled last year amid COVID-19 turmoil.
That is according to analysis by consultancy firm Mercer, which found that the DB deficit at FTSE 350 firms was £70bn at the end of last year, up from £40bn 12 months earlier.
Liability values rose from £815bn to £914bn during that time – driven by falls in corporate bond yields – while asset values increased from £775bn to £844bn.
Charles Cowling, chief actuary at Mercer, said that a relatively modest reduction in funding levels last year hides “far more dramatic consequences” of 2020.
“Total pension liabilities are now more than twice the size of pension liabilities in 2009 – despite the large majority of private sector pension schemes closing to new accrual and record levels of pension buyouts and other liability settlements.
“With bigger pension schemes comes bigger risk, and many of the old industry businesses have failed to keep up with the growth in their pension schemes.
“Moreover, not all trustees have taken advantage of opportunities to de-risk their pension schemes and some are much more exposed to market volatility.”
Mercer’s data relates to about 50% of all UK pension scheme liabilities, with deficits calculated using the approach companies have to adopt for their corporate accounts.
The firm warned that COVID-19 has threatened the strength of the employer covenant available to support pension schemes, with some businesses facing an existential crisis.
Cowling said that schemes are now caught in a “perfect storm” of growth in pension liabilities and risk, along with growing employer covenant risk.
This comes after the Bank of England suggested lower interest rates this year, while new legislation pending with the Pensions Regulator will encourage trustees to focus on their long-term plans for low-risk sustainability.
“One message continues to be even more important at this time – consider looking for every opportunity to take risk out of pension schemes, whether through better hedging or cash-flow driven investment strategies and/or through liability settlement programmes, including buyouts,” Cowling continued.
“This might at least result in 2021 being a better year than 2020 has been.”
Image credit: iStock
Author: Chris Seekings