Uncertainty continues to hit FTSE 350 pension deficit
Political and economic volatility are impacting heavily on the UK’s pension funds. According to the latest figures, pension deficits are still worryingly high, while liability values could be set to take a beating in the event of an economic slowdown tied to Brexit.
In recent years challenging market conditions and an ageing population have seen some schemes run increasingly large deficits. However, in 2018, reporting into the segment has found that most pension schemes were relatively well-positioned going forward, with the aggregate deficit for the FTSE 350 having notably fallen from £75 billion to £35 billion by the turn of the year.
Since then, however, volatility has quickly returned to the UK pensions market. Having briefly moved into surplus last year, the FTSE 350 pension deficit slid to £67 billion by August 2019. While the situation in September seemed to stabilise slightly, with funding increasing, this still left the group of pensions in a £50 million deficit.
At the same time, September saw liability values – the amount of money that an organisation has to account for in order to make future pension payments – decrease by £8 billion to £906 billion, compared to £914 billion at the end of August. According to experts from Mercer, worse could well be set to come in regard to liabilities too, having a drastic impact on the pensions of millions living in Britain.
Charles Cowling, Actuary at Mercer, explained, “The unprecedented political turmoil in the UK shows no sign of easing. Uncertainty over Brexit and speculation over a possible General Election are causing nervousness and volatility in markets. Fears for the global economy too have seen interest rates fall to record lows around the world… Against this backdrop of political uncertainty sources within the Bank of England indicated that it may, once again, have to cut interest rates, which could send pension liabilities to even higher levels. Trustees that have not fully hedged their interest rate risks could see pension deficits soar.”
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.
According to previous work on the matter by Mercer, many pension funds failed to take advantage of a lull in deficits last year in order to plan for future changes. However, there is still time to use the analysis currently being provided to right course now.
Maria Johannessen, Partner and Corporate Consulting Leader in Mercer’s Wealth business, said, “Looking at the month end position we see a reduction in deficit over September. However, the real story is the volatility of the figures over the month. Looking at the daily figures we see a £25 billion range in deficit levels from £49 billion to £74 billion. Liabilities varied by £45 billion in the same period. This uncertainty shows that there is a real benefit to actively monitoring the funding position and spotting opportunities to manage risks when circumstances are supportive of doing so.”
