The total deficit for all UK private sector pension plans plunged 45% to £43 billion at the end of May, from £78 billion at the end of April, according to JLT Employee Benefits (JLT). The deficit is now less than one-third of its size at the same time last year, when it totaled £135 billion.
The shrinking deficit was a result of the total assets of all UK private sector pension plans rising £38 billion to £1.577 trillion during the month, while liabilities increased only £3 billion to £1.62 trillion during that same time. This brought the plans’ aggregate funded level to 97% in May, compared to 95% the previous month, and 92% at the same time last year.
“Markets continue to be positive for pension schemes and overall reported pension deficits are showing a strong improvement from 12 months ago,” Charles Cowling, director of JLT Employee Benefits, said in a release. “Indeed, the FTSE 100 is very close to showing an aggregate surplus in its pension schemes for the first time in a decade.”
The aggregate funded level of the FTSE 100 pension plans rose to 99% at the end of May, up from 98% at the end of April, and 95% at the end of May 2017. And the funded level of the pension plans of the FTSE 350 companies also rose to 99% at the end of May, from 97% a month earlier, and 94% at the same time last year.
Despite the rising funded levels, Cowling said the outlook for interest rates is “crucial” for pension plans, pointing out that The Bank of England’s Monetary Policy Committee was expected to raise interest rates last month, but did not. He said two factors suggest that the next rise in interest rates could still be months away. One factor is “positive signs on inflation” with the latest headline rate at 2.2%, down from 2.3% last month. The second is that there has been a change announced to the Bank of England’s Monetary Policy Committee, with Jonathan Haskel replacing Ian McCafferty starting in September.
Cowling said Haskel, an academic economist and productivity expert at Imperial College London, is expected to bring “insights and understanding on the UK economic outlook at a time when there are increasing signs of the economy stuttering with Brexit looming imminently.”
He also noted that The Pensions Regulator’s chief executive Lesley Titcomb is stepping down at the end of her term in February. Cowling said that based on a recent government white paper promising a tougher stance on pension funding, it is possible that this could be a sign that politicians intend to increase their attention toward pensions.
“So this latest good news in markets may just be the calm before the storm,” said Cowling. “Perhaps this should trigger companies and pension schemes to take advantage of the current relative good times and seek opportunities to de-risk and settle liabilities whilst they can.”