FTSE 350 pension deficits increase with Omicron uncertainty

15 December 2021 Consultancy.uk

The aggregate accounting deficit of FTSE 350 companies’ defined benefit pension schemes is now more than double the level seen before the pandemic, according to new research. The deficit now sits at over £104 billion.

A pension deficit a gap between how much a pension is required to pay out, and how much money is available to pay out. Many things can cause the growth of a pension deficit, including economic uncertainty, which results in a fall in the value of equities and bond yields, both of which are often used as investment vehicles for pension funds.

These decreases may be short or long term, but the impact is still the same – the real value of the whole pension fund is decreased. Conversely, it is also possible for the values to increase over time, increasing the pension fund value and reducing the deficit. In recent years, the uncertainty surrounding the UK’s EU referendum result and subsequent devaluation of the pound, saw bond yields fall significantly and leading to a dramatic rise in pension deficits of FTSE 350 companies, to more than £150 billion.

FTSE350 Retirement Plan deficits and funding levels

In the years since, Mercer analysis shows that the deficit did eventually reduce – with investors becoming increasingly clear on what the impacts of Brexit would be. By 2019, pension deficits among the FTSE 350 had fallen to £50 billion. That was before the coronavirus crisis saw the world economy collapse back into more unprecedented uncertainty.

Two years on, Mercer’s Pensions Risk Survey data shows pension deficits are once again spiralling upward. Mercer estimates the aggregate combined funded ratio of plans operated by FTSE 350 companies on a monthly basis, using data relating to about 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.

The accounting deficit of defined benefit (DB) pension schemes and other post-retirement benefit plans for the UK’s 350 largest listed companies rose by £10 billion over the course of November, an acceleration which took the overall deficit faced by these firms to £104 billion. The increase was driven by a £31 billion increase in liabilities to £962 billion at the end of the month, caused by a fall in corporate bond yields and an increase in market expectations of inflation.

Commenting on the changes, Tessa Page, UK Wealth Trustee Leader at Mercer, said, “The impact on markets of the new Omicron variant served to highlight that the pandemic is not yet over. Alongside this fresh uncertainty, inflation remains a hot topic with significant increases observed and potentially more to come… As a pandemic-fatigued nation heads towards the Christmas break, this was a month in which unhedged assets again failed to keep pace with liabilities – risk management should be high on the agenda for all schemes in 2022.”

Looking ahead, Mercer advised trustees and employers considering their risk exposure. Page added that while some inflation drivers such as supply chain issues and reopening price pressures are arguably “temporary”, others resulting from the pandemic may be longer term. The release from Mercer concluded that data published by the Pensions Regulator and elsewhere tells a similar story.