FTSE 350 pensions deficits driven towards record high

FALLING bond yields have driven the accounting deficits of the UK’s biggest pension schemes towards a record high.

Defieicts rose by 17% last month, according to research from Mercer.

The consultant’s latest Pension Risk Survey found that falling bond yields helped push the deficit at FTSE 350 firms from £81bn to £95bn over the month, Professional Pensions reports.

The slight drop in yields was partially offset by recovering equity markets and falling inflation expectations, but Mercer said it was concerning that shortfalls were heading towards January’s high of £133bn.

At 31 July, asset values were up £9bn on last month at £633bn and liability values were up £23bn to £728bn.

Mercer senior partner Ali Tayyebi said the 2.5% returns enjoyed by the FTSE 100 over the month would have raised hopes that funding levels would improve.

But he said: “A relatively small reduction in yields available on long-dated corporate bonds has meant that the deficit has in fact increased quite substantially over the month. It is particularly concerning that deficits have now edged very close to the last monthly high, as seen at the end of January 2015, despite corporate bond yields being nearly 65 basis points higher than they were at that time.”

Mercer principal Le Roy van Zyl said: “It appears the end-June improved deficit position was a short-lived bounce, with volatility continuing in July and pension scheme deficits increasing significantly over the month.”

The Organisation for Economic Co-operation and Development has previously warned that persistently low bond yields posed a risk to the solvency of schemes.

Last month the Pension Protection Fund warned last month that high deficits had increased the likelihood of it missing its target of being self-sufficient by 2030.

Looking beyond the FTSE 350, data from JLT Employee Benefits found funding levels across the private sector as a whole dropped from 86% to 83% over the year to the end of July.

Schemes had assets totalling £1,254bn to meet liabilities of £1.513bn on an IAS19 basis.

JLT Employee Benefits director Charles Cowling said “Even though governor of the Bank of England Mark Carney has signalled that a rise in interest rates may be imminent, pension scheme deficits remain stubbornly high.

“Some rise in interest rates is already anticipated in market prices, so companies and pension schemes may be disappointed to see little respite in pension deficits for many months, even years yet.”

Further reading: Deficit recovery plans – running to stand still?