FTSE 350 DB scheme deficit rises by £3bn in September - Mercer

The accounting deficit of defined benefit (DB) pension schemes for FTSE 350 companies climbed from £70bn at the end of August to £73bn on 30 September, according to Mercer.

The company’s Pension Risk Survey showed that the increase had been driven by an £8bn rise in liabilities from £869bn to £877bn across the same period, which was attributed to falling bond yields.

The rise in liabilities overshadowed a £5bn increase in asset values to £804bn.

Mercer chief actuary, Charles Cowling, said: “September was another quiet month for most pension schemes as markets continued to hold up well, whilst inflation continued to decline. However, pension schemes are facing a variety of potential risks.

“A second wave of coronavirus is hitting the UK, resulting in further lockdowns and economic pain; the Brexit negotiations appear to be deadlocked raising doubts about an EU trade deal and the outcome of the contentious US Presidential Election could impact markets.

“Finally, the Bank of England seems to be considering the possibility of negative interest rates, with a rate cut of 0.25 per cent potentially adding a further £35bn to pension scheme deficits.”

Cowling noted that this uncertainty “creates more risk for pension trustees whilst many employers are going through serious challenges”, adding that the potential for new regulations on long-term funding strategies could contribute to “further strain on already stretched finances”.

Mercer partner and corporate consulting leader, Maria Johannessen, commented: “With all this systemic risk in the economy corporates and trustees are urged to monitor carefully and be ready to seize opportunities to manage risk. Now may be a good time for trustees to consider a move to contractual cash flow matching investments.”

Mercer’s survey data relates to around 50 per cent of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their end of year accounts.

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