FTSE 350 pension deficit nearly doubles over a year hit by Brexit and COVID

Deficits – the gap between what a company needs to pay in pensions to employees and the money available to pay them - in defined-benefit pension schemes have been made worse by central bank action to deal with the coronavirus.

By pushing down interest rates in the hope of stimulating an economic recovery, they have made long-term pension promises much more expensive. Retired workers are also living longer, adding to the increase in expected future costs.

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies finished the year at £70bn.

This compares to £40bn at the end of 2019. Liability values rose from £815bn at 31 December 2019 to £914bn at the end of December 2020, driven by falls in corporate bond yields. Asset values were £844bn compared to £775bn at the end of 2019. The corresponding deficit at the end of November was £77bn

“Though it could appear there was no major impact on pension schemes, the relatively modest reduction in funding levels hides far more dramatic consequences of a really challenging year for some,” said Charles Cowling, chief actuary at Mercer.

He pointed out parallels between the pandemic crisis and the financial crisis of 2008, but also said there were two big differences: the size of total pension liabilities – now more than twice that in 2009 – and large growth in employer covenant risk.

He said one message continued “to be even more important at this time”, namely that trustees should consider looking for every opportunity to take risk out of their pension schemes, whether through better hedging or cash-flow driven investment strategies and/or through liability settlement programmes, including buyouts.

Here is just a selection of companies showing their pension deficit as a percentage of their market capitlisation.

Stagecoach Group has a 198.6% deficit as a percentage of their market cap. In essence this means that their deficit is nearly twice the size of what the company is actually worth.

BT 78%

First Group 64%

Capita 59%

TUI 57.2%

Dixons Carphone Warehouse 47%

Rolls Royce 36.8%

BAE 31.2%

Greencore 30.1%

Mitchells and Butlers 29.2%

With road and rail services showing the larger percentages, the deficits are increasing across all other industries including IT, telecommunications, retail, aerospace, food and beverage and leisure.

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