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 was £79bn at the end of February, an increase from £66bn at the previous month. Liability values fell from £889bn at 31 January 2021 to £858bn at the end of February 2021, driven by increased corporate bond yields which were offset by an increase in inflation expectations. Asset values were £779bn compared to £823bn at the end of January, a fall of £44bn.
Charles Cowling, Chief Actuary at Mercer, said: “Markets are showing signs of nervousness. The Chancellor Rishi Sunak will deliver his Budget on Wednesday at a time when Government finances are shaky and borrowing is at record levels. The Chancellor needs to raise taxes to pay for the spiralling debt but there are dire warnings from nearly all commentators that the UK economy cannot take tax rises at present and additional support for the UK economy is needed. Last month, the Bank of England warned of the possibility of negative interest rates within six months. In recent weeks there are market concerns about future inflation rising – possibly in response to increasing worries about the UK economy. These are testing times for pension schemes – particularly in the industries hardest hit by the pandemic. It is possible to see scenarios where scheme liabilities continue to rise, pension asset values are under fire and more companies get into difficulty and possibly even falling into insolvency.
“The situation is not gloomy for all trustees. Many, thankfully, have now de-risked their pension scheme investments and largely matched their assets to their liabilities. Nevertheless, some pension schemes are running more risk than can be easily supported by the strength of the employer covenant. The Pensions Regulator guidance on integrated risk management suggests pension trustees reduce risks to levels that can be managed by their struggling employers. That’s easier said than done. Pension scheme deficits can be filled only by investment performance or additional funding from employers. De-risking, reducing the potential for future investment gains, can make the pension scheme numbers appear worse, increasing employer funding, and increase pressure on employers. “In these challenging times, pension trustees should monitor their risks carefully and should consider taking opportunities to reduce them when and where possible.”
Mercer’s Pensions Risk Survey data relates 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 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. Data published by the Pensions Regulator and elsewhere tells a similar story.