Defined benefit (DB) schemes for the UK’s largest listed companies held steady during 2021 despite a ‘strange’ year, according to latest data.
Mercer’s Pensions Risk Survey reveals the accounting deficit of DB pension schemes for the UK’s 350 FTSE-listed companies finished the year at £76bn. This compares to £70bn in 2020. Liability values changed little, falling from £914bn to £913bn, but asset values fell back slightly, from £844bn to £827bn.
“Anyone comparing December 2020 with December 2021 would conclude that UK pension deficits were stable and plain sailing,” said Mercer UK wealth trustee leader Tess Page. “However, this belies the rocky ride across the period – 2021 was another strange year, and we saw bond yields and investment markets jumping around a lot, and considerable debate around future inflation.
“That said, given the ongoing pandemic and considerable economic uncertainty, schemes have arguably made it through so far with relatively little damage. Looking ahead to 2022, we see some looming risks.”
Mercer warns that future monetary policy is far from clear, with the recent global rise in inflation raising questions over whether central banks will act. Rising inflation could also intensify political and socio-economic tensions between the ‘winners’ and ‘losers’ from the pandemic, undermining market confidence in the independence of central banks.
The COVID-19 pandemic remains a complicating factor, Mercer warns, with many businesses suffering “very substantial shocks” that threaten the strength of the employer covenant available to support the pension scheme.
“Trustees will need to keep a close eye on the strength of employer covenants and it is possible that we will see more calls on the Pension Protection Fund in 2022, particularly as government support schemes tail off,” Page added.
“Overall, while some pension schemes have kept their heads comfortably above water in 2021, others are barely staying afloat. Schemes that have not yet managed their significant risks – notably inflation, interest rates, and growth asset risk – will see volatile funding level movements from month-to-month.”