Pension funding spikes in turbulent year

Latest figures show that the funding position of all UK private sector defined benefit (DB) pension schemes has improved in the 12 months from December 2017, but political and economic pressures affected business confidence

On 31 December 2018 the funding level for FTSE 100 DB pension schemes was 97%, a £20bn deficit, compared to 95% or £33bn in December 2017. FTSE 350 companies improved their position by 1%, from 95% (£43bn deficit) in 2017 to 96% (£29bn) in 2018.

The funding level of all UK private sector pension schemes remained static at 93%, although there was a material decrease in the deficit from £119bn to £107bn.

The positions are calculated by JLT Employee Benefits (JLT) under the standard accounting measure IAS 19 Employee Benefits, which was modified in February 2018 to specify how companies can determine their pension expenses when changes to a DB pension plan are made.

According to Charles Cowling, the chief actuary at JLT, 2018 was a ‘turbulent year’ for pension schemes as political uncertainty, in particular regarding Brexit, took its toll. He noted that ‘At one point during the year, before Brexit fears resurfaced, the aggregate position for FTSE100 pension schemes moved into surplus for the first time in a decade’ but that the improvement was not long-lasting.

However, he said that ‘a sustained slowing down in the rate of improving life expectancy’, as well as no change to the Bank of England’s position on quantitative easing were all ‘good news’ for pension schemes.

He did note that some companies are still facing ‘extremely difficult times’, ascribing this to the fact they ‘may have gambled too much and in vain on equity returns and rising interest rates to save them from debilitating pension deficits’.

‘In particular the retail sector is seeing very difficult trading conditions. Christmas 2018 does not appear to have been kind to the high street. For the third consecutive year footfall has dropped with early indications suggesting a drop of 3% on last year.

‘On top of this falling high street property values, as well as pension woes, are piling on the pressure. Household names such as Debenhams and Marks & Spencer are under pressure - particularly from hedge funds holding short positions - and it seems sadly inevitable that HMV will not be the only retail business falling into administration on the back of a poor Christmas.’

Report by James Bunney

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