The twin challenges of Brexit and Covid-19 have seen the FTSE 350 pension deficit nearly double during the year, with scheme trustees urged to look for opportunities to reduce risk
Research by Mercer shows the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies finished the year at £70bn, up from £40bn at the end of 2019.
Liability values rose by £99bn, from £815bn at 31 December 2019 to £914bn at the end of December 2020, driven by falls in corporate bond yields.
Asset values were £844bn compared to £775bn at the end of 2019. The corresponding deficit at the end of November was £77bn.
In its analysis, Mercer warned that the challenges of 2020 may have severe consequences for some pension schemes which have only recently moved back into surplus after the 2008 financial crisis.
The consultancy pointed out that total pension liabilities are now more than twice the size of pension liabilities in 2009, despite the large majority of private sector pension schemes closing to new accrual and record levels of pension buyouts and other liability settlements.
It said bigger pension schemes represent bigger risk, while many of the old industry businesses have failed to keep up with the growth in their pension schemes, and not all trustees have taken advantage of opportunities to de-risk their pension schemes with some much more exposed to market volatility.
Secondly, in some sectors, notably hospitality, retail and travel, the pandemic has produced very significant changes that threaten the employer’s ability to support the pension scheme and even the survival of the business.
Charles Cowling, chief actuary at Mercer, said: ‘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.
‘2021 therefore brings many challenges for pension scheme trustees. But one message continues to be even more important at this time – trustees 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.’