FTSE 350 DB pension deficit nearly doubles in 2020

05 Jan 2021

Defined benefit (DB) pension schemes’ deficit for the UK’s 350 largest listed companies was £70bn at the end of last year, from £40bn at the end of 2019, according to Mercer.

Declines in corporate bond yields drove liability values from £815bn at the end of 2019 to £914bn at the close of last year, while asset values ended the year at £844bn compared to £775bn, says an IPE Magazine report.

In November 2020, the FTSE 350 accounting deficit of DB schemes was £77bn.

According to Charles Cowling, chief actuary at Mercer: “2020 was strange and difficult, not to say unprecedented, for everyone as well as for pension schemes.

“Though it could appear there was no major impact on pension schemes, the relatively modest reduction in funding levels hides far more dramatic consequences of a really challenging year for some.”

Cowling also cautioned that total pension liabilities are now over double the size they were in 2009, says a Pensions Age report.

“Moreover, not all trustees have taken advantage of opportunities to de-risk their pension schemes and some are much more exposed to market volatility," he went on to add.

The chief actuary at Mercer also noted that several companies have endured "very significant shocks" during the Covid crisis, “so whilst some pension schemes have not been badly hit by the 2020 crisis, others are caught in a perfect storm.

“They have seen a big growth in pension liabilities and risk and a big growth in employer covenant risk.

“At the same time the Bank of England is suggesting even lower interest rates this year and new pensions legislation pending with the Pensions Regulator rightly encouraging trustees to focus on their long term plans for low-risk sustainability - something that will seem very far off for many trustees.”

He continued: “2021 therefore brings many challenges for pension scheme trustees.

"But one message continues to be even more important at this time – should consider looking for every opportunity to take risk out of their pension schemes, whether through better hedging or cash-flow driven investment strategies and/or through liability settlement programmes, including buyouts.

“This might at least result in 2021 being a better year than 2020 has been.”