The combined final salary pension deficit of the UK’s 350 largest listed companies more than trebled to reach £137bn in 2016, despite the stock market ending the year on a high, according to a leading consultancy.
The retirement consultancy Mercer said a sharp fall in corporate bond yields and higher inflation expectations had both hit schemes. It found that the combined accounting deficit of FTSE 350 company schemes rose to £137bn on 30 December, even though the FTSE 100 index ended the year at an all-time high that day. At the end of December 2015 the corresponding deficit was £39bn.
Alan Baker, Mercer’s UK defined benefit risk leader, said: “After a very challenging year, pension deficits increased again and end the year more than three times higher than the end of 2015. This continues to put real pressure on any risk management plans, and will require trustees and corporate sponsors to work closely together.”
Strong investment returns and company pension contributions were offset by the market turmoilafter both the Brexit vote and Donald Trump’s surprise US election victory, which had a big impact on bond yields.
Overall, corporate bond yields fell by more than 100 basis points during 2016, increasing liabilities on companies’ balance sheets, said Mercer. Added to this, economists have warned that inflation is likely to rise sharply in 2017, to around 3%.
Le Roy van Zyl, a senior consultant at Mercer, said companies and pension scheme trustees faced “significant uncertainty”. He added: “Brexit is likely to move beyond a mere intention, and the effect of new leadership in the US will become clear – not to mention other major events, such the French presidential elections. If we look at how volatile conditions have been, and how volatile they may well continue to be, schemes will have to be responsive on a variety of issues.”
Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts.
Shortly before Christmas, another pensions consultancy, Hymans Robertson, warned that 2017 would be a challenging year for the UK’s final salary schemes. It said many companies would be “even less willing” than before to divert money into their schemes to plug deficits, adding: “Rightly or wrongly, the focus of corporates will be on improving profitability, seeking growth opportunities and protecting earnings.”
Meanwhile, the International Longevity Centre UK thinktank recently said that while around half of all final salary schemes were now closed to new members, the number of retiring workers receiving a final salary pension would remain in the millions well into the latter half of this century.
