Pensions - Articles - FTSE350 pension deficit rises as second lockdown ends

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 rose from £75bn at the end of October 2020 to £77bn on 30 November. Liability values rose from £871bn at 30 October to £897bn at the end of November. Asset values were £820bn (an increase of £24bn compared to £796bn at the end of October).

 Charles Cowling, Chief Actuary at Mercer, said: “Markets and pension scheme funding levels continue to hold up against a volatile environment. This is largely in response to hopes of a successful vaccine rollout over the next few months. However, the national restrictions are causing many businesses huge problems ahead of the Christmas holidays. On top of the pandemic, Brexit looms ever closer with still no indication of a deal – and therefore even less time for businesses to prepare for a range of potential outcomes.”

 “With the outlook for the economy weakening, the Bank of England responded this month with another round of Quantitative Easing (QE) increasing total QE by a further £150bn to £895bn. At some stage this QE is going to have to be unwound, although that’s unlikely to happen any time soon. In the interim the impact of QE is to keep interest rates low and pension scheme liabilities high.”

 Mr Cowling concluded: “On top of all this, the Government announced that the RPI measure of inflation will be replaced by CPIH from 2030. Although on the radar for many months it has caused challenges for pension schemes looking to hedge their assets and liabilities. The outlook of lower interest rates for longer and changes to the inflation index mean that hedging strategies may need to be reviewed. Trustees should consider reviewing their approach to hedging assets and liabilities to ensure their strategy remains optimal.”

 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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