Defined Benefit  

UK private pensions deficit more than doubles

UK private pensions deficit more than doubles

The shortfall of all UK private defined benefit (DB) schemes has jumped by £59bn in one month, to £107bn at the end of December, according to data from JLT Employee Benefits.

At the end of November, the total deficit stood at £48bn, while at the end of December last year it reached £119bn.

The funding level of these pension funds is now at 93 per cent, which compares with 97 per cent in the previous month.

FTSE 100 companies saw scheme deficits increase by £19bn to £20bn, while in the FTSE 350 the increase was £23bn to £29bn.

According to Charles Cowling, chief actuary at JLT Employee Benefits, the increases in these shortfalls are due to Brexit uncertainties, which have intensified considerably in recent weeks and are weighing on UK financial markets, with significant falls in UK equities and pressure too on Sterling.

He said: "All of this gave rise to increases in the outlook for inflation and a lowering of expectations for economic growth."

However, Mr Cowling said that while 2018 was a turbulent year for pension schemes it was not all negative.

He said: "Markets were initially strong in the face of considerable political uncertainty and signs emerged that interest rates are at last on the way up.

"That said, there is no sign yet of an unwinding of the Bank of England’s position on quantitative easing. Additionally, the latest mortality analysis increasingly points to a sustained slowing down in the rate of improving life expectancy.

"All of this is good news for pension scheme deficits which have shown some modest improvement over the past year. At one point during the year, before Brexit fears resurfaced, the aggregate position for FTSE 100 pension schemes moved into surplus for the first time in a decade."

Companies and their pension schemes face "a very mixed picture", Mr Cowling noted.

He said: "Some have successfully navigated the turbulent markets, have paid in significant additional contributions and are now looking to lock down on emerging pension surpluses by securing pension liabilities in the insurance market.

"We believe that 2019 will be another bumper year for insurance company buy-outs, possibly enhanced by the emergence of other superfund consolidators, who are looking at different and cheaper routes for companies to offload their pension liabilities."

However, other companies are still facing extremely difficult times, he stated.

He said: "They may have gambled too much and in vain on equity returns and rising interest rates to save them from debilitating pension deficits. In particular the retail sector is seeing very difficult trading conditions. Christmas 2018 does not appear to have been kind to the high street.

"Household names such as Debenhams and Marks & Spencer are under pressure – particularly from hedge funds holding short positions – and it seems sadly inevitable that HMV will not be the only retail business falling into administration on the back of a poor Christmas."

maria.espadinha@ft.com