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FTSE350 pension deficits rocket to a record GBP119bn in wake of Brexit

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The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from GBP98 billion on 31 May 2016 to GBP119 billion at the end of June in the aftermath of the Brexit vote.

That’s according to Mercer’s latest Pensions Risk Survey data which reveals that as at 30 June 2016, asset values were GBP694 billion, representing a rise of GBP31 billion compared to the corresponding figure of GBP663 billion at 31 May 2016.
 
Liability values were GBP813 billion, an increase of GBP52 billion compared to the corresponding figure of GBP761 billion at the end of May.
 
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, the immediate response of the markets to Brexit was clearly bad news for pension scheme deficits.
 
“The fall in corporate bond yields meant that liability values increased by over five per cent during just one month, corresponding to a 20 per cent increase in deficit values,” says Ali Tayyebi, senior partner in Mercer’s retirement business. “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 eight per cent.
 
“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.”  
 
Le Roy van Zyl, senior consultant in Mercer’s financial strategy group, says: “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. Clearly, trustees and sponsors should be assessing the new state of affairs to determine if new priorities are needed or any action taken. Uncertainty may be here for some time.”
 
Mercer’s data relates to about 50 per cent of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. 

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