Pension deficits fell by £7 billion in May

UK organisations’ pension deficits shrunk by £7 billion during May, according to figures from Towers Watson.

In addition, UK equities have so far returned minus 6.1%, making May the worst monthly return since February 2009 and the second worst since the height of the financial crisis. This contributed to an estimated £11 billion fall in FTSE 350 companies’ pension fund assets during the month.†

John Ball, head of defined benefit consulting at Towers Watson, said: “This might seem a perverse result, but it arises because it is not only stock markets that are volatile. An unprecedented combination of economic conditions makes it harder to predict what will happen to inflation over the coming years, and when inflation expectations jump around, so do pension deficits.

“Recent experience has reinforced employers’ desire to match assets more closely to liabilities so the health of their balance sheet is less dependent on things they cannot control – whether that is stock markets, inflation or anything else.

“However, if they did this overnight, trustees would demand more cash to plug pension shortfalls because they could not expect investment returns on their assets to do as much of the work. If de-risking pensions is going to be a long journey, employers need to set themselves some staging posts.

“That means knowing what prices they are prepared to lock in and making sure they can act quickly when market opportunities arise. The recent market turmoil reinforces the need for companies and trustees to lay the groundwork so they can act quickly when conditions are right.”