Final salary pension deficit of UK firms 'hits £137bn'

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05 Jan, 2017

Final salary pension deficit of UK firms 'hits £137bn'

The combined final salary pension deficit of the UK’s 350 largest companies spiralled to a massive £137bn in 2016, despite the stock market closing the year on a high, according to a leading consultancy.

The HR firm Mercer said a severe fall in corporate bond yields and higher inflation expectations had both affected schemes. It discovered that the combined accounting deficit of FTSE 350 company schemes grew to £137bn on 30 December, even though the FTSE 100 index ended 2016 at a record high that day. At the end of December 2015 the corresponding deficit was £39bn.

Mercer’s UK Defined Benefit Risk Leader, Alan Baker, 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 equalled out by the market turmoil after both the Brexit vote in the EU referendum and Donald Trump’s surprise US election win, which had a big impact on bond yields.

Overall, corporate bond yields dropped by more than 100 basis points during 2016, increasing liabilities on companies’ balance sheets, said Mercer. On top of this, economists have warned that inflation is expected 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 continued: “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 half 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 businesses would be “even less willing” than before to inject money into their schemes to plug deficits.

They added: “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 second half of this century.

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