FTSE 350 pension deficit increased by 28% in turbulent 2018

FTSE 350 pension deficit increased by 28% in turbulent 2018

FTSE 350 pension deficit increased by 28% in turbulent 2018

  • 7 January 2019
  • United Kingdom, London
  • Pension deficits increased from £32bn to £41bn in 2018, driven by falling asset prices and anticipated GMP equalisation costs
  • Increase was despite schemes being in surplus for five months from May to September
  • Volatility demonstrates importance of schemes locking in financial gains

Mercer has today published its 2018 Pensions Risk Survey which shows that the deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from £32bn at the end of 2017 to £41bn at the end of 2018; a 28% increase in the deficit. Overall, the quoted funding level decreased by 1% to 95% for the full year.

The rise in deficit was driven by a £19bn fall in asset values from £766bn to £747bn, while liabilities remained broadly flat, reducing by just £10bn from £798bn to £788bn, from 2017 to the end of 2018.

However, the movements mask a volatile year, in which pension schemes were in surplus for five months from May to September. December alone saw the deficit increase by £24bn to £41bn, almost entirely due to increasing liabilities as corporate bond yields fell, partially offset slightly by a fall in market implied inflation.

Le Roy van Zyl, Partner at Mercer, said: “2018 was a turbulent year and it is disappointing to see it finish in deficit after finally reaching a surplus for the first time since Mercer began regularly monitoring the position. While the return to deficit is unwelcome, we are still in a markedly better position compared to the very large deficit following the 2016 Brexit vote. However, the significant volatility demonstrates the importance of schemes locking in gains when opportunities to take risk off the table arise.”

Andrew Ward, Partner at Mercer, added: “2018 was a record year for premiums paid to insurers for buy-ins and buy-outs, with more than £20bn of DB obligations being insured. We forecast nearly one third of a trillion pounds to be paid by UK private sector DB pension schemes over a three-year period, from 2019 - 2021. While the direction of travel is clear, it is important schemes consider how prepared they are for any market shock. With continued Brexit related uncertainty, trustees must ensure the risks they’re running are consistent with their objectives and protects their sponsors’ long term financial security.”

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 2017 was £766 billion, compared with estimated aggregate liabilities of £798 billion. Allowing for changes in financial markets through to 31 December 2018, changes to the FTSE350 constituents, and newly released financial disclosures, the estimated aggregate assets were £747 billion, compared with the estimated value of the aggregate liabilities of £788 billion.

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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