UK’s £65bn pension problem to solve itself


19 Oct, 2017

UK’s £65bn pension problem to solve itself

UK businesses could see their taxing pension deficits practically wiped clean if the Bank of England raises interest rates as is expected, according to New York-based consultancy firm Mercer.

Coupled with adequate budgeting for slowing gains in life expectancy, this will give executives one less thing to worry about as they make ready their contingency plans in case Britain opts for a no-deal scenario with the European Union. Companies like BT Group Plc and Marks & Spencer Group Plc, whose liabilities are almost double their market value, will also remove a stigma that has contributed to years of under-performance in their shares.

“If you bought a basket of these stocks you would probably make money from here,” said Andrew Millington, the acting head of UK equities at Aberdeen Standard Investments, which owns shares in firms with big pension liabilities like Tui AG, BAE Systems Plc and AA Plc that he expects will benefit.

The prospect of corporate Britain filling gaps in staff retirement budgets without having to slash dividends would have been unthinkable even a year ago. The shortfalls of FTSE 350 companies had surged to a record £165 billion ($217 billion) as the BOE cut rates to spur the economy after the Brexit vote, correcting pension incomes that rely on higher bond yields.

But private corporations have been “climbing out of a pit” since then, according to principal of UK wealth at Mercer, Glyn Bradley. The gap dropped to an 18-month low of 65 billion pounds in September, partly because pension fund managers made more on their equity investments as the FTSE 100 rallied 8% in the past year.

Not all investors have paid attention to the U-turn. The 14 firms with the largest liabilities relative to market value have trailed the FTSE 350 by 10 percentage points since Brexit, according to figures by Bloomberg and RBC Capital Markets.

The significant game changer will be if BOE Governor Mark Carney raises interest rates to counter inflation triggered by the pound’s post-Brexit slump. A 50 basis-point increase would bring the pension deficit down to about 12 billion pounds, Mercer projections show.

Traders expect a move of such magnitude to happen within in the next 12 months, possibly starting as early as the BOE’s November 2nd meeting.

Today's News - Decision day for Catalonia and Spain as ultimatum looms