FTSE350 pension liabilities reach record £747 billion high amid Brexit uncertainty

At 29 April 2016, asset values were £655bn, representing a fall of £2bn compared to the corresponding figure of £657bn at 31 March 2016, according to Mercer’s Pensions Risk Survey.

Liability values were £747bn, representing an increase of £9bn compared to the corresponding figure of £738bn at the end of March. Liabilities are now at levels not seen since April last year when they stood at £750bn.

Over April, corporate bond yields swung by 15 basis points, which is broadly equivalent to a £20bn movement in liabilities. The consultancy says that political uncertainties around Brexit have undoubtedly contributed to the volatility in corporate bond yields.

“The continued fall in corporate bond yields during April has again pushed up the measure of liabilities used by companies for reporting their pension liabilities on the balance sheet. This resulted in deficits increasing by £11m to a record high at the end of April of £92bn, despite a positive month for most European stock markets,” said Ali Tayyebi, senior partner in Mercer’s Retirement business. “In contrast the corresponding measure of liabilities typically used by pension scheme trustees and companies for funding decisions, which is based on government bond yields, may have fallen by around £15bn over the same period.”

Le Roy van Zyl, principal in Mercer’s financial strategy group, said: “April has been a “mixed” month for pension schemes’ financial position, with the funding deficits pension scheme trustees focus on improving, but accounting results for sponsors deteriorating. With funding deficits significantly recovered from February, it is tempting to say that the worst has passed. But it is very difficult to express any degree of confidence about this. There are a number of political and economic narratives, such as Brexit uncertainty, that can significantly impact financial positions, and there should be particular focus on consideration of locking in some of the recent gains or being prepared to do so if conditions improve even further. Consistent with a robust Integrated Risk Management framework, you then have less downside exposure should conditions subsequently worsen.”

Mercer’s data relates to about 50 per cent of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.