Pension funding levels steady at end of bumpy year
Pension funding has rallied at the start of the year, after months of uncertainty around the Omicron variant had previously grown the pension deficit of the FTSE350. According to research from Mercer, however, the coming year may be far from straight forward.
Tessa Page, Mercer UK Wealth Trustee Leader, commented, “Anyone comparing December 2020 with December 2021 would conclude that UK pension deficits were stable and plain sailing. However, this belies the rocky ride across the period – 2021 was another strange year, and we saw bond yields and investment markets jumping around a lot, and considerable debate around future inflation.”
Mercer’s Pensions Risk Survey data shows that the defined benefit (DB) pension schemes for the UK’s 350 largest listed companies saw their deficits shrink approaching the New Year, finishing at £76 billion. Alongside 2020’s December figures of £70 billion, this seems relatively stable – however it is a drastic improvement from just a month earlier, when the deficit had hit a four-year peak of £104 billion.
At the time, the impact on markets of the new Omicron variant was partially blamed, providing fresh uncertainty for investors. Further down the line, despite these pressures and considerable economic uncertainty, schemes have arguably made it through so far with relatively little damage, though. Mercer and Page issued caution on this front however: there are “looming risks” which still need accounting for. Beyond the pandemic, which Page noted was still “far from over,” she suggested that monetary policy may also cause turbulence for pension funds.
Page explained, “The recent global rise in inflation is not now seen as “transitory”, though the scale is perhaps amplified by temporary factors and base effects. Will central banks act on monetary policy or just continue to talk? Rising inflation could also intensify the political and socio-economic tensions between the “winners” and “losers” from the pandemic, undermining market confidence in the independence of central banks.”
Looking at the year which has passed, while some pension schemes have kept their heads comfortably above water in 2021, others are barely staying afloat. They will need clarity to address their ongoing issues. For example, many schemes have not yet managed their significant risks, including inflation, interest rates, and growth asset risk – and when Mercer looks back on 2022, this may be flagged up by volatile funding level movements from month-to-month.
