FTSE 350 defined benefit pension deficit rises to £41bn at the end of 2018

Le Roy van Zyl

The accounting deficit for defined benefit (DB) pension schemes at the UK’s top 350 organisations increased by 28% between the end of 2017 and the end of 2018, rising from £32 billion to £41 billion, according to research by Mercer.

Its 2018 Pension risk survey, which analyses the pension deficit calculated using the approach FTSE 350 organisations have to adopt for their corporate accounts, noted that this increase in deficit was primarily driven by a £19 billion fall in asset values, from £766 billion to £747 billion. Liability values fell by £10 billion, dropping from £798 billion to £788 billion between December 2017 and December 2018.

Andrew Ward, partner at Mercer, said: “2018 was a record year for premiums paid to insurers for buy ins and buy outs, with more than £20 billion of DB obligations being insured. We forecast nearly one third of a trillion pounds to be paid by UK private sector DB pension schemes over a three-year period, from 2019-2021.

“While the direction of travel is clear, it is important schemes consider how prepared they are for any market shock. With continued Brexit related uncertainty, trustees must ensure the risks they’re running are consistent with their objectives and protects their sponsors’ long-term financial security.”

These figures form part of a volatile year in terms of DB pension deficits. Between May and September 2018, DB pension schemes at FTSE 350 organisations were in surplus, but in December 2018, the pension deficit nearly doubled, increasing from £24 billion to £41 billion. This was attributed to increasing liabilities as corporate bond yields fell, partially being offset by a corresponding fall in market implied inflation.

The quoted funding level decreased by 1%, to 95%, over the course of 2018.

Le Roy van Zyl (pictured), partner at Mercer, added: “[Last year] was a turbulent year and it is disappointing to see it finish in deficit after finally reaching a surplus for the first time since Mercer began regularly monitoring the position.

“While the return to deficit is unwelcome, we are still in a markedly better position compared to the very large deficit following the 2016 Brexit vote. However, the significant volatility demonstrates the importance of schemes locking in gains when opportunities to take risk off the table arise.”