Coronavirus pushes DB deficits up £100bn

Defined benefit (DB) pension scheme deficits rose by around £100bn in the last week of February due to the impact of the coronavirus outbreak, new analysis by Hymans Robertson has revealed.

Furthermore, the impact of the virus on the financial markets has already seen solvency deficits rise to £500bn.

However, the firm has warned of a potential a supply side macroeconomic shock if the virus continues to spread, which could see further increases in solvency deficits, up to £900bn.

This follows the "fastest stock market correction on record" last week, which saw the S&P 500 drop more than 10 per cent in six days.

Commenting on the analysis, Hymans Robertson partner, Calum Cooper, said: “If efforts to contain the virus fail, companies may struggle to meet demand which could cause a ‘supply shock’ that will be felt in the global markets.

"If this was to happen the effects would be felt by pension schemes in the shape of a around 14 per cent increase in liabilities and a drop-in solvency funding levels by approximately 16 per cent of £400bn.

“This could be attributed to an expected sharp fall in shares, property and commodity prices and changing currency movements causing emerging market bond yields to rise and ‘safe haven’ currencies such as the USD, JPY and CHF to outperform.

"While the impact of this will not be felt evenly by every pension scheme it could become a very real challenge for a sizable minority."

Hymans Robertson has also highlighted the heightened market volatility that has emerged in the wake of the coronavirus epidemic, warning that this will likely increase the degree of variability in funding positions for schemes.

Cooper added: “The virus could also lead to one-off shocks in longevity. Latest estimates are that the overall mortality rate of those infected is around 2.3 per cent.

"If similar mortality rates impacted the UK, and we assume that around 1/3 of the UK population get COVID-19, then would lead to an average 1 per cent fall in liabilities in isolation. In addition, the impact on sponsor cashflows could significantly weaken the strength of sponsor covenants."

Mortality rates more broadly saw their largest fall since 2011 in 2019, falling to 3.8 per cent lower than 2018.

This has in turn prompted further concerns over DB liabilities as industry experts warned that declining interest rates have made DB liabilities more sensitive to changes in life expectancy.

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