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The Actuary The magazine of the Institute & Faculty of Actuaries

FTSE 350 pension deficit falls by £8bn

The deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies fell from £84bn to £76bn over 2017 – a decrease of more than 9%.

Stock market performance cuts deficit ©iStock
Stock market performance cuts deficit ©iStock

That is according to analysis by Mercer, which shows that the fall came despite liabilities increasing to £857bn at the end of last year, compared with £821bn 12 months earlier.

This was because firms also experienced a £44bn rise in asset values, which totalled £781bn at 21 December 2017, with Mercer estimating that the improved financial positions could result in increased profits of £400m this year.

“This is money which can be invested to stimulate growth and drive the British economy, or can be returned directly to investors,” Mercer DB policy group chair, Alan Baker, said.

“Trustees who run schemes however need to continue to be prudent and ask themselves how much risk they need to take to meet their funding requirements.”

The data relates to around half of all UK pension scheme liabilities, with the recorded deficit fall reversing the trend of 2016 in which the shortfall more than doubled.

Despite the decrease, Mercer head of risk transfer consulting, Andrew Ward, warned that significant risks are still being taken, and that the positive result was largely thanks to stock market performance.

As a result, trustees are being urged to consider how prepared they are for a market shock, and to determine the potential impact Brexit uncertainty could have on their sponsor’s financial security.

“Against this backdrop, the pace of risk management activity we saw in 2017 is likely to accelerate and we expect 2018 to be the biggest year ever for pension risk transfer,” Ward added.

The findings come after research by JLT Employee Benefits (JLT) revealed that just 19 FTSE 100 firms now provide DB benefits, with provision estimated to have reduced 15% over the last 12 months.

This is thought to reflect the fact that firms are increasingly cutting DB pensions in order to prevent ballooning liabilities becoming an increasingly material risk.

“It is sad to see that we are now witnessing the final demise of DB pension schemes in the UK,” JLT director, Charles Cowling, said. “They have simply become too expensive.”

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