The funding situation of DB pension in the UK continues to improve despite the challenging economic backdrop.
The latest Mercer’s Pensions Risk Survey found the accounting deficit of DB schemes in the FTSE 350 was £66bn at the end of January. This compares to £70bn at the end of December 2020.
Liability values fell from £914bn at 31 December 2020 to £889bn at the end of January 2021, driven by an increase in corporate bond yields. Asset values were £823bn compared to £844bn at the end of December.
Mercer chief actuary Charles Cowling says: “Markets are holding up well, despite another very challenging lockdown causing chaos for British industry.
“Retailers also suffered their worst annual sales performance on record in 2020. The UK is heading into its second ever double dip recession, although the Bank of England warns that the UK economy is facing its ‘darkest hour’, surprisingly, we have seen positive news on pension funding.
“There are still potential storm clouds looming for pension schemes however. Firstly, in an attempt to boost the Covid-ravaged economy, the Bank of England Monetary Policy Committee raised the possibility of negative interest rates for the first time in UK history. Negative rates would not be good news for pension schemes who are already struggling with increasing liabilities caused by record low rates.”
He adds that the positive news on vaccines may not be enough for many companies and industries badly hit by the pandemic.
Cowling says: “The Pensions Regulator is encouraging trustees to monitor employer covenants ever more closely. As we emerge from lockdown, there are going to be many businesses fighting for survival as Government support dwindles. Pension schemes may well suffer so trustees should closely monitor their risks and should consider taking opportunities to reduce them when and where possible.”
Mercer’s Pensions Risk Survey data relates to about 50 per cent of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts.