The accounting position of the defined benefit pension plans of the UK’s FTSE 350 companies plummeted in April as it swung from a surplus of £10 billion ($12.4 billion) at the end of March to a deficit of £52 billion at the end of the April due to the impact of the COVID-19 pandemic.
Data from consulting firm Mercer’s Pensions Risk Survey shows that liabilities of the UK’s 350 largest listed companies surged by £102 billion to £897 billion at the end of April compared with £795 billion at the end of March. At the same time, asset values grew but failed to keep pace with liabilities, rising by only £40 billion to £845 billion from £805 billion at the end of March.
“Pension deficits, as measured by accounting rules for company accounts, have not changed much compared to 12 months ago; however, pension liabilities as measured by trustees have jumped as equity markets and interest rates have witnessed record falls,” Charles Cowling, Mercer’s chief actuary, said in a statement. “It will be a challenging year for actuarial valuations, with any demands from trustees for extra cash likely to be unwelcome as many employers struggle to find the cash to keep their businesses going.”
Cowling noted that The Pensions Regulator (TPR) has a “difficult path to steer” as it wants trustees to focus on long-term reductions in risk and improvements in funding, while also encouraging them to work with employers to manage the immediate impact of pandemic.
“TPR is mindful that we are in exceptionally difficult times and many employers are teetering on the edge,” Cowling said. “A previous chancellor of the Exchequer asked TPR and trustees to consider the growth prospects of companies when reaching agreement on pension contributions. Now, perhaps survival prospects should be the focus, and so trustees need, more than ever, to understand what level of cash contributions employers can truly afford.”
Cowling also said he expects the frequency and intensity of trustee monitoring of employers in the current environment to increase significantly “until covenant visibility and strength is restored.”
Mercer’s estimates of the aggregate funded ratio of plans managed by FTSE 350 companies are based on projections of their reported financial statements adjusted from each company’s financial year-end in line with financial indices. This includes UK domestic funded and unfunded plans, and all non-domestic plans.
The firm’s Pensions Risk Survey data relates to approximately half of all British pension plan liabilities and analyzes pension deficits calculated using the approach companies are required to adopt for their corporate accounts.