FTSE 350 pension deficit nearly doubles over a year hit by Brexit and virus

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies finished the year at £70bn.

This 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, driven by falls in corporate bond yields. Asset values were £844bn compared to £775bn at the end of 2019. The corresponding deficit at the end of November was £77bn.

Charles Cowling, Chief Actuary at Mercer, said: “2020 was strange and difficult, not to say unprecedented, for everyone as well as 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.”

Mr Cowling added: “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.

“By 2018 pension schemes had once again clawed themselves back into an overall surplus, only for COVID to strike at a time when a fragile UK economy was also struggling with Brexit. Although the impact appears less than that of the 2008 financial crisis, there are two big differences that might concern all pension scheme trustees. Firstly, total pension liabilities are now more than twice the size of pension liabilities in 2009 – despite the large majority of private sector pension schemes closing to new accrual and record levels of pension buyouts and other liability settlements. With bigger pension schemes comes bigger risk, and many of the old industry businesses have failed to keep up with the growth in their pension schemes. Moreover, not all trustees have taken advantage of opportunities to de-risk their pension schemes and some are much more exposed to market volatility.”