FTSE 350 defined benefit pension deficit reaches £36bn


The accounting deficit for defined benefit (DB) pension schemes at the UK’s top 350 organisations is £36 billion as at October 2018, resulting in the largest deficit since October 2017, according to research by Mercer.

Its Pension risk survey, which analyses the pension deficit calculated using the approach FTSE 350 organisations have to adopt for their corporate accounts, also noted a deterioration in funded status between September 2018 and October 2018. This declined from a £3 billion surplus to a £36 billion deficit. The quoted funding level, therefore, has fallen from 100% to 95%.

LeRoy van Zyl, defined benefit strategist and partner at Mercer, said: “Trustees continue to take action to reduce risk and consolidate financial gains. The need for taking selective action was demonstrated again during October as markets stepped back significantly from previous gains. With the continuing backdrop of uncertainty likely to persist in the run up to the UK’s departure from the [European Union] early next year, trustees should evaluate the potential impact on their sponsor’s financial security and put themselves in a position to capitalise on de-risking opportunities as they arise.”

Liability values have increased from £764 billion at the end of September 2018 to £795 billion at the end of October 2018; the research attributes this to a one-off £15 billion liability increase arising from the High Court’s judgment in Lloyds Banking Group’s guaranteed minimum pensions (GMP) equalisation case. Other influences include a fall in corporate bond yields and an increase in market implied inflation.

Asset values fell between September and October 2018, decreasing from £767 billion to £759 billion.

Adrian Hartshorn, senior partner at Mercer, added: “On 26 October, the High Court ruled that pension schemes have an obligation to equalise benefits resulting from inequalities in the calculation and payment of guaranteed minimum pensions. Such equalisation will potentially increase the benefits paid to members and liabilities of schemes.

“Preliminary analysis following the Lloyds High Court judgment has suggested an increase to liabilities of between £15 billion and £20 billion, with the additional costs potentially flowing through the [profit and loss] account. [While] the onus is on individual trustees and sponsors to understand the particular circumstances of their scheme and act accordingly, our analysis suggests that there is a once in a lifetime opportunity to simplify schemes, reduce ongoing administration costs and reduce buy-in and buy-out costs for schemes that follow that path. I would therefore encourage all scheme sponsors and trustees to understand and explore the options available for achieving this.”