FTSE 350 pension deficit hits £70bn at end of year

The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies finished 2020 at £70bn, data from Mercer has confirmed.

Mercer’s Pensions Risk Survey revealed that the latest figure compares to £40bn at the end of 2019.

Liability values rose from £815bn at 31 December 2019 to £914bn at the end of December 2020, which Mercer suggested was driven by falls in corporate bond yields.

The data also showed that asset values were £844bn compared to £775bn at the end of 2019 – with the corresponding deficit at the end of November sitting at £77bn.

Mercer chief actuary, Charles Cowling, described 2020 as “strange and difficult” for pension schemes.

“Though it could appear there was no major impact on pension schemes, the relatively modest reduction in funding levels hides far more dramatic consequences of a really challenging year for some,” Cowling said.

“There are parallels with the financial crisis of 2008. Before that hit, pension schemes had by 2007 clawed themselves back into overall surplus – on an IAS19 measurement.

“The programme of Quantitative Easing implemented following the banking crisis still has a huge impact on pension schemes today – with its progressive lowering of interest rates. Overall, the extended crisis drove pension schemes back into overall deficit with funding levels dropping below 90% for a while.”

Mercer’s Pensions Risk Survey data relates to around 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.

Cowling warned that while some pension schemes have not been badly hit by the 2020 crisis, others are “caught in a perfect storm”.

“They have seen a big growth in pension liabilities and risk and a big growth in employer covenant risk,” he added.

“At the same time, the Bank of England is suggesting even lower interest rates this year and new pensions legislation pending with the Pensions Regulator rightly encouraging trustees to focus on their long term plans for low-risk sustainability – something that will seem very far off for many trustees. 2021 therefore brings many challenges for pension scheme trustees.”

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