FTSE 350 Pension Deficit Hits Two-Year High

Mercer warns pension trustees to brace for a no-deal Brexit.

The accounting deficit of defined benefit pension plans for the UK’s 350 largest publicly traded companies widened by £16 billion ($19.7 billion) hitting a two-year high of £67 billion as of Aug. 30, from £51 billion at the end of July, according to consulting firm Mercer. The increased deficit lowered the plans’ aggregate funding level to 93% from 94%.

It was the second straight month that the deficit has risen and was more than five times larger than the £3 billion increase reported in July. During the month, liability values increased £30 billion to £914 billion compared with £884 billion at the end of July. At the same time, asset values increased £14 billion to £847 billion from £833 billion at the end of July.

“August saw the largest monthly increase in the deficit in 2019, bringing it to highs unseen for nearly two years,” Maria Johannessen, a partner and head of corporate consulting at Mercer, said in statement.

Johannessen said under-hedged plans took the biggest deficit hit, and that the overall increase was largely driven by a reduction in corporate bond yields. The liability values surged by more than 3% in just one month. 

“As political uncertainty is likely to escalate,” Johannessen said, “stakeholders need to take an active approach to monitoring the funding position and spotting opportunities to manage risks.”

Mercer warned that a no-deal Brexit has become more likely due to UK Prime Minister Boris Johnson’s decision to prorogue Parliament, which closes Parliament for five weeks. The firm said that this could result in a potential sterling crisis and a spike in inflation.

“Trustees and sponsors would be wise to prepare for political volatility and very difficult financial markets,” Charles Cowling, an actuary at Mercer, said in statement. “Combined with downward pressure on interest rates, as President Trump increases pressure on the Federal Reserve to cut rates far more aggressively, the months ahead could see serious implications on scheme finances and risk.”

Cowling also said that trustees will be nervous over how employer covenants are affected by a no-deal Brexit.

“Against a very uncertain backdrop, trustees will have real challenges in making effective decisions,” said Cowling. “It’s important that they examine the risks they are taking and work through various scenarios to establish whether their schemes face material dangers.”

In particular, he said trustees should look at the investment risks they are running, and should consider putting in place “pragmatic mitigating measures and investment de-risking at the earliest opportunity.”

Mercer’s data relates to approximately 50% of all UK pension plan liabilities and analyzes pension deficits calculated using the approach companies have to adopt for their corporate accounts.

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