The pension deficit of Britain’s largest companies increased during 2016, reversing most of the gains made in 2015, Barnett Waddingham’s annual survey of FTSE 100 pension disclosures has revealed.
Despite significant contributions by scheme sponsors the overall deficit rose by more than £10bn to almost £25bn.
The survey also highlighted a change in asset allocation in recent years. The average allocation to growth assets, equity and property, has steadily decreased from 46 per cent in 2009 to 29 per cent in 2016, while bonds and fixed income assets have increased from 41 per cent in 2009 to around 54 per cent in 2016.
Martin Hooper, associate at Barnet Waddingham, said: “On the face of it, the deficits disclosed by the FTSE 100 remained remarkably stable, given the scale of movements in discount rates and inflation expectations. However, with the level of contributions made towards the pension deficits over the year, companies would have been hoping for an improvement.
“Looking ahead, the market is currently pricing in a gradual rise in interest rates. If these do not materialise it will significantly limit any progress made towards improving the FTSE100 pensions deficit.
"The market has already priced in higher inflation expectations following the Brexit vote and the US election. However, further uncertainty and any knock-on effect on the sterling, could raise inflation expectations and push up valuations of liabilities.
“The IAS19 disclosures are ultimately only an indicator of the financial health of these schemes. The cash requirements, reassessed every three years and the actual cost to the sponsor, will depend on how the assets are invested and what returns can be achieved, as well as how liabilities are discharged.
"For valuations carried out in the coming three yearly cycle, deficits against the funding basis may be significantly worse. It is likely many schemes will have to rethink their timetable for achieving full funding and whether the gilts-based funding approach, typically used for scheme funding, remains appropriate.”
