Pension deficits rocket to new record after EU exit vote

Mercer’s Pensions Risk Survey data showed that the accounting deficit of defined benefit pension schemes for the UK’s 350 largest listed companies increased from £98bn on May 31 to £119bn at the end of June in the aftermath of the Brexit vote.

On June 30, asset values were £694bn, representing a rise of £31bn compared with the corresponding figure of £663bn on May 31.

Mercer said that pension liabilities are at the highest level since Mercer’s monitoring began.

Increases in asset values, driven by the devaluation of sterling and the possibility of a cut in UK bank base rates, have offset this increase in liabilities.

However, Mercer said the immediate response of the markets to Brexit was clearly bad news for pension scheme deficits. Ali Tayyebi, senior partner in Mercer’s Retirement business, said: “The fall in corporate bond yields meant that liability values increased by over 5 per cent during just one month, corresponding to a 20 per cent increase in deficit values.

“Government bond yields fell even more than corporate bond yields which meant that liabilities on the funding basis, which pension scheme trustees typically use for setting cash contribution requirements, increased by over 8 per cent.”

Mr Tayyebi said the level of market volatility in the last week of June is just an early skirmish in the fight to understand the longer term outlook for the UK’s economy and markets.

“More than ever, the risks and associated opportunities which this creates and the appropriate speed of response will be very specific to the circumstances of individual pension schemes, highlighting the value of frequent monitoring of funding levels and, for some clients, delegated investment management,” he said.

Le Roy van Zyl, senior consultant in Mercer’s Financial Strategy Group, said: “Brexit may be positive for some schemes, for example, where the business outlook of the sponsor has improved significantly due to better export prospects.

“For others, their ability to continue to underwrite pension deficits and risk taking may have deteriorated significantly.”