Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from £90bn at the end of June 2020 to £103bn on 31 July. Liability values rose by £13bn to £970bn at the end of July compared with £957bn at the end of June. Asset values were £867bn (unchanged since the end of June).

Charles Cowling, Chief Actuary, Mercer, said: “Pension scheme deficits worsened again in the last month and compared to 12 months ago, as market turmoil continues. We may have reached the limit of the easing of lockdown measures ahead of any vaccine for coronavirus becoming available, and globally the outlook remains bleak with coronavirus cases increasing. In the UK many sectors are still operating in crisis mode and some experts predict it will be 2024 before the UK economy returns to normal. Meanwhile, the economy is expected to shrink by over 10% this year due to the winding down of the furlough programme and unemployment could get close to 10% by year end.

“These are testing times for Trustees who, more than ever, need to understand the financial challenges facing sponsoring employers. Focus will be on the Bank of England this week as it meets to review interest rates. Although a change to base rates is unlikely, it seems that markets are already pricing in a cut to negative rates and the Bank is expected to publish a report on the prospect of negative rates. Now is not the time for pension trustees to be increasing investment risk. Rather, where possible, trustees should consider reducing risk, taking market opportunities to increase hedging programmes and contemplate lower risk contractual cash flow matching investments.

Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Data published by the Pensions Regulator and elsewhere tells a similar story.

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