While the UK economy may be out of recession, pension schemes are not, with aggregated defined benefit deficits quadrupling last year, research from PricewaterhouseCoopers has shown.
The professional services firm’s Pensions Support Index measures the level of support provided to the DB schemes of the companies in the FTSE 350. It showed a deterioration from 83 points to 80, out of a maximum of 100, for the period to 31 December 2014.
The firm said that this is the first fall in the PSI score since September 2011, driven by a large increase in scheme deficits over the year.
However, the fall in the score was not uniform and PwC’s data showed that the index increased to 2 points to 85 in the first half of 2014, due to favourable equity market conditions. However, in the second half of the year this reversed, as gilts and equity performance dropped.
At the end of December, aggregated pension scheme deficits reached £266.3bn, compared with £46.4bn in January 2014.
PwC said this is down to a 29 per cent rise in pension liabilities during the period, whilst pension assets rose by 10 per cent. This trend has continued into 2015, with pension deficits rising a further £101bn to £367.5bn in January alone.
The steep increase in pension liabilities has been driven by a sharp decline in gilt yields. The firm said that sponsors and trustees should be asking themselves what longer term impact the fall in rates should be having on their investment strategy.
Citing the recent pension freedoms, Philip Smith, part of the pensions consulting team at PwC, said that in the past year the whole industry has been running really fast to try and get everything done, but it’s not quite there yet.
“We’ve got consumers who are asked to be actuaries and figure out how long they are going to live, you are asking them to be pension tax experts, and you are asking them to be investment managers; so that’s a huge challenge for the industry to overcome.”
According to Mercer’s Pensions Risk Survey data for April, the accounting deficit of DB schemes for the largest 350 listed companies rose from £127bn at 31 March to £128bn at the end of the month; while funding levels remained at 83 per cent.
ruth.gillbe@ft.com