Top British Company Pension Deficits Grow

Pension funds of Britain’s largest companies slipped further into the red during the past three months, according to industry experts.

The deficit increased by £2 billion to £113 billion in May 2014, says expat pensions and benefits firm Mercer.

The firm points out that although many companies are seeing the value of pension funds increase, the schemes are still slipping further into debt as liabilities grow at a faster rate.

A collapse in corporate bond yields partly set off against lower than expected inflation was cited by the firm as one of the main underlying reasons for the deficit increase.

The figures were collected as part of Mercer’s Pensions Risk Survey for defined benefit pension schemes offered by FTSE350 companies.

Liabilities outpace asset increases

The survey estimates the companies hold pension assets at £113 billion below the required amount of pension liabilities listed in their accounts – a funding ratio of 84%.

The companies held pension assets of a combined value of £583 billion at the end of May 2014, which was £8 billion higher than the end of the month before.

Liabilities against these assets totalled £696 billion.

So far in 2014, despite rising asset values, pension deficits for the FTSE 350 companies have increased by £17 billion and the funding ratio has dropped by 1%.

The firm warns the survey is only a snapshot of the overall picture of defined pension benefit finding in the UK, as only around half of firms are covered in the analysis.

However, similar data released by The Pensions Regulator echoes the results of the Mercer survey.

Wringing value out of assets

“We are seeing a monthly trend that is repeating,” said Ali Tayyebi, a senior partner in Mercer’s retirement business.

“Although the value of assets is increasing, the rise is outperformed by a bigger increase in the cost of liabilities, so the gap between what’s needed to fund company pensions and the money actually available is widening.”

Tayyebi also explained fund managers are working their assets harder to wring more value out of them without over exposure to risk just to keep up with increasing liabilities.

The company also warned that although pension funding levels have been pegged around 84% – 85% for some months, the figure is an average and some companies have closed the deficit/liability gap by hedging interest rates or investing in corporate bond spreads.

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