Pensions - Articles - GBP39bn hit to FTSE350 pension schemes finances in October

Mercer’s Pension Risk Survey data shows that the accounting position of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies deteriorated by £39bn in October resulting in the largest deficit since October 2017.

 The figures show a deterioration in funded status from those calculated at the end of September with funded status declining from a surplus of £3bn to a deficit of £36bn. The quoted funding level fell from 100% to 95%. Liabilities have increased from £764bn to £795bn due to a one-off increase in liabilities estimated at £15bn arising from the High Court judgment in the Lloyds GMP equalisation case, as well as a fall in corporate bond yields and an increase in market implied inflation. Asset values fell from £767bn to £759bn.

 “On 26 October the High Court ruled that pension schemes have an obligation to equalise benefits resulting from inequalities in the calculation and payment of guaranteed minimum pensions (GMPs). Such equalisation will potentially increase the benefits paid to members and liabilities of schemes,” said Adrian Hartshorn, Senior Partner at Mercer.

 “Preliminary analysis following the Lloyds High Court judgment has suggested an increase to liabilities of between £15bn and £20bn, with the additional costs potentially flowing through the P&L account. Whilst the onus is on individual trustees and sponsors to understand the particular circumstances of their scheme and act accordingly, our analysis suggests that there is a once in a lifetime opportunity to simplify schemes, reduce ongoing administration costs and reduce buy-in and buy-out costs for schemes that follow that path. I would therefore encourage all scheme sponsors and trustees to understand and explore the options available for achieving this”, added Mr Hartshorn.

 LeRoy van Zyl, DB Strategist and Partner at Mercer, added: “Trustees continue to take action to reduce risk and consolidate financial gains. The need for taking selective action was demonstrated again during October as markets stepped back significantly from previous gains. With the continuing backdrop of uncertainty likely to persist in the run up to the UK’s departure from the EU early next year, trustees should evaluate the potential impact on their sponsor’s financial security and put themselves in a position to capitalise on de-risking opportunities as they arise.”

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