Defined Benefit  

FTSE 350 schemes see £39bn deficit hit after GMP case

FTSE 350 schemes see £39bn deficit hit after GMP case

The UK’s 350 largest listed companies have seen their defined benefit (DB) pension schemes’ deficits deteriorate by £39bn in October, resulting in the biggest deficit since October 2017, according to data from Mercer.

The quoted funding level fell from 100 per cent to 95 per cent, while liabilities increased from £764bn to £795bn due to a one-off increase of £15bn arising from the High Court judgment in the Lloyds GMP equalisation case, as well as a fall in corporate bond yields and an increase in market implied inflation.

Asset values fell from £767bn to £759bn, according to Mercer.

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On 26 October the High Court ruled that trustees must equalise benefits between women and men who have guaranteed minimum pensions (GMPs) as a result of contracted out benefits.

Adrian Hartshorn, senior partner at Mercer, said trustees should take this opportunity to simplify their schemes and reduce costs.

He said: "On 26 October the High Court ruled that pension schemes have an obligation to equalise benefits resulting from inequalities in the calculation and payment of guaranteed minimum pensions. Such equalisation will potentially increase the benefits paid to members and liabilities of schemes.

"Preliminary analysis following the Lloyds High Court judgment has suggested an increase to liabilities of between £15bn and £20bn, with the additional costs potentially flowing through the P&L account. 

"Whilst the onus is on individual trustees and sponsors to understand the particular circumstances of their scheme and act accordingly, our analysis suggests that there is a once in a lifetime opportunity to simplify schemes, reduce ongoing administration costs and reduce buy-in and buy-out costs for schemes that follow that path. 

"I would therefore encourage all scheme sponsors and trustees to understand and explore the options available for achieving this."

LeRoy van Zyl, DB strategist and partner at Mercer, said trustees should continue to take action to reduce risk and consolidate financial gains.

He said: "The need for taking selective action was demonstrated again during October as markets stepped back significantly from previous gains.

"With the continuing backdrop of uncertainty likely to persist in the run up to the UK’s departure from the EU early next year, trustees should evaluate the potential impact on their sponsor’s financial security and put themselves in a position to capitalise on de-risking opportunities as they arise."

Last month, Mercer reported a deficits increase of £5bn for the third quarter of the year, which led to DB scheme deficits reaching £34bn at the end of September.

Darren Redmayne, ceo of Lincoln Pensions, said: "There is still too much focus on deficit figures, but this is just one measure of underlying risk."

He added a large deficit may be tolerable if there is a robust covenant standing behind it. "A pension is only as good as the company or entity supporting the risk," he said.

Venilia Batista Amorim is a freelance writer for FTAdviser