02 September, 2019

United Kingdom, London

  • Pension deficit for FTSE 350 companies increases by £16bn in August to £67bn
  • Liabilities increased by £30bn due to a 0.3% fall in corporate bond yields
  • Increasing likelihood of no-deal Brexit has led to a surge in the deficit, making it vital for trustees to effectively monitor and manage risk

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 increased by £16bn, from £51bn at the end of July to £67bn on 30 August. The quoted funding level fell from 94% to 93%. During the period, liability values increased by £30bn to £914bn compared to £884bn at the end of July due to a 0.3% fall in corporate bond yields. Correspondingly, asset values increased by £14bn from £833bn at the end of July to £847bn.

Maria Johannessen, Partner and Corporate Consulting Leader in Mercer’s Wealth business, said: “August saw the largest monthly increase in the deficit in 2019, bringing it to highs unseen for nearly two years. Under-hedged schemes took the lion’s share of the deficit hit. The overall increase was largely driven by a reduction in corporate bond yields, which meant that liability values increased by over 3% in just one month.  As political uncertainty is likely to escalate, stakeholders need to take an active approach to monitoring the funding position and spotting opportunities to manage risks.”

Charles Cowling, Actuary at Mercer, added: “Following Prime Minister Boris Johnson’s decision to prorogue Parliament, a no-deal Brexit on 31 October looks increasingly likely. Facing a potential sterling crisis and a spike in inflation, trustees and sponsors would be wise to prepare for political volatility and very difficult financial markets. Combined with downward pressure on interest rates, as President Trump increases pressure on the Federal Reserve to cut rates far more aggressively, the months ahead could see serious implications on scheme finances and risk.

“Trustees will also be looking nervously at to see how employer covenants are affected by a no-deal Brexit. Against a very uncertain backdrop, trustees will have real challenges in making effective decisions. It’s important that they examine the risks they are taking and work through various scenarios to establish whether their schemes face material dangers. In particular, trustees should look at the investment risks they are running. Many schemes should consider putting in place pragmatic mitigating measures and investment de-risking at the earliest opportunity.”

Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses 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. But data published by the Pensions Regulator and elsewhere tells a similar story.

Notes to Editors

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 2018 was £747 billion, compared with estimated aggregate liabilities of £788 billion. Allowing for changes in financial markets through to 30 August 2019, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £847 billion, compared with the estimated value of the aggregate liabilities of £914 billion.

About Mercer

Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan Companies (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people with 76,000 colleagues and annualized revenue approaching $17 billion. Through its market-leading businesses 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.

Sample Data Points