The accounting deficit of FTSE 350 companies’ defined benefit (DB) pension schemes increased by £2bn during November to £77bn, Mercer’s latest Pensions Risk Survey has revealed.

Liability values rose from £871bn to £897bn during the month as bond yields fell and inflation expectations increased.

The £26bn increase in liabilities was partially offset by assets rising from £796bn to £820bn over the same period.

Mercer urged trustees to maintain monitoring as the pandemic continues to affect the UK economy and financial markets.

“Markets and pension scheme funding levels continue to hold up against a volatile environment,” commented Mercer chief actuary, Charles Cowling. “This is largely in response to hopes of a successful vaccine rollout over the next few months.

“However, the national restrictions are causing many businesses huge problems ahead of the Christmas holidays. On top of the pandemic, Brexit looms ever closer with still no indication of a deal – and therefore even less time for businesses to prepare for a range of potential outcomes.

“With the outlook for the economy weakening, the Bank of England responded this month with another round of quantitative easing (QE), increasing total QE by a further £150bn to £895bn."

Cowling noted that although QE will have to be unwound at some stage, it is unlikely to happen any time soon, and the impact of QE will keep interest rates low and pension scheme liabilities high in the meantime.

“On top of all this, the government announced that the Retail Price Index (RPI) measure of inflation will be replaced by the Consumer Price Index including owner occupiers’ housing costs (CPIH) from 2030,” Cowling continued.

“Although on the radar for many months it has caused challenges for pension schemes looking to hedge their assets and liabilities.

“The outlook of lower interest rates for longer and changes to the inflation index mean that hedging strategies may need to be reviewed. Trustees should consider reviewing their approach to hedging assets and liabilities to ensure their strategy remains optimal.”

Mercer’s Pensions Risk Survey data relates to around 50 per cent of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts.

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