- Pension deficit for FTSE 350 companies increases by £3bn in July to £51bn
- £24 billion increase in liabilities due to 0.16% decline in corporate bond yields
- Political uncertainty and potential market volatility increase the importance of risk management for trustees
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 grew in July, from £48bn at the end of June to £51bn by the end of July, a £3bn increase. The funded status was unchanged over the month at 94%.
Liability values increased by £24bn to £884bn during the period due to a 0.16% decline in corporate bond yields, only slightly offset by a 0.02% fall in market implied inflation. Asset values stood at £833bn, a £21bn increase from £812bn at the end of June.
Maria Johannessen, Partner at Mercer, said: “We are seeing a continuation of the see-sawing we’ve experienced over the last couple of months. This fluctuation is due to, among other reasons, increasing political and financial market uncertainty. Depending on planned activities, it may well be important for stakeholders to carefully manage risk and shield themselves from market movements, particularly in the lead up to October 31st.”
Charles Cowling, Actuary at Mercer, added: “July’s increase in deficit can be partly attributed to recent political developments, including the election of Boris Johnson as Prime Minister and preparations for a no-deal Brexit, which are causing increased market volatility, particularly in currency markets. A fall in the value of sterling has the potential to create a spike in inflation and now there is also an increasing likelihood of an interest rate cut by the Bank of England following the Federal Reserve’s recent decision. Taken together with the possibility of a no-deal Brexit, the combination of political and financial volatility could result in a precarious perfect storm for trustees and pension schemes in the autumn. Trustees should therefore urgently evaluate the potential impact of political and economic uncertainty on their sponsors and pension schemes and be in a position to capitalise on de-risking opportunities as they arise.”
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 31 July 2019, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £833 billion, compared with the estimated value of the aggregate liabilities of £884 billion.
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