£39bn hit to FTSE350 pension schemes’ finances in October

£39bn hit to FTSE350 pension schemes’ finances in October

£39bn hit to FTSE350 pension schemes’ finances in October

  • 5 November 2018
  • United Kingdom, London
  • October has seen the largest swing in month end deficits for the financial position of pension schemes since August 2016
  • There was a decline of £39bn, turning a £3bn* surplus at the end of September into a £36bn deficit at the end of October
  • £15bn of the increased deficit can be attributed to the Lloyds High Court judgment on GMP equalisation

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.”

For more information on the implications of GMP Equalization, please listen to Mercer’s recent GMP Equalisation – Immediate reactions webinar

Notes to Editors

* The latest data has been updated to reflect the actual published accounting information for companies with year-ends up to 31 December 2017. These figures have been adjusted for changes in market conditions since that date. Prior month figures have been restated to allow for this new information.

Mercer estimates the aggregate combined funded ratio of plans operated by FTSE350 companies on a monthly basis. This is based on projections of their reported financial statements adjusted from each company’s financial year end in line with financial indices. This includes UK domestic funded and unfunded plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the FTSE350 companies at 31 December 2017 was £766bn, compared with estimated aggregate liabilities of £798bn. Allowing for changes in financial markets through to 31 October 2018, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £759bn, compared with the estimated value of the aggregate liabilities of £780bn.

About Mercer
Mercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 22,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer. In the UK, Mercer Limited is authorised and regulated by the Financial Conduct Authority.

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