Pensions - Articles - FTSE350 pension funding levels hold steady during bumpy year

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies finished the year at £76bn. This compares to £70bn at the end of 2020 but only £41bn as at 31 December 2018. Liability values were little-changed (falling from £914bn to £913bn) whereas asset values fell back slightly, from £844bn to £827bn.

 Tess Page, Mercer UK Wealth Trustee Leader, said: “Anyone comparing December 2020 with December 2021 would conclude that UK pension deficits were stable and plain sailing. 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.”

 Miss Page added: “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.

 Firstly, the path of monetary policy is far from clear. The recent global rise in inflation is not now seen as “transitory”, though the scale is perhaps amplified by temporary factors and base effects. Will central banks act on monetary policy or just continue to talk? Rising inflation could also intensify the political and socio-economic tensions between the “winners” and “losers” from the pandemic, undermining market confidence in the independence of central banks.

 Secondly, as our Prime Minister reminded us on the recent press conference, the pandemic is far from over. There is still much that is unknown about the Omicron variant, and further strains and waves of the virus may occur. Many businesses have already suffered 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.”

 Miss Page concluded: “Overall, whilst 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. 2022 therefore brings opportunities to map out a clear plan for risk management – with the new Funding Code and Single Code of Practice on the horizon there has never been a better time to do so.”

 Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by the Pensions Regulator and elsewhere tells a similar story.

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