The aggregate funding level for UK pension schemes has neared an all-time low in the wake of Brexit and the Bank of England’s (BoE) subsequent lowering of interest rates, according to Pension Protection Fund (PPF) data.
Figures from the PPF revealed the estimated deficit for the 5,945 defined benefit (DB) schemes eligible for entry to the lifeboat fund increased from £383.6bn at the end of June to £408bn at the end of July – a funding level decrease from 78% to 77.4%.
The PPF said record lows in gilt yields had continued to put pressure on pension scheme funding, but the ratio of assets to liabilities was still above the record low seen in 2012.
It added: “Total liabilities increased in cash terms but the ratio of assets to liabilities is still above the all-time low of 76.4% in May 2012. Members of defined benefit schemes have the protection the PPF offers in the event that their employer, or former employer, fails and the scheme cannot afford to pay their promised pension.”
Blackrock head of UK strategic clients Andrew Tunningley said: “Pension scheme funding remains down in the dumps. The rise in equities over the month was not enough to combat a further drop in already low yields, bringing the index down to its lowest funding level ever.
“The tremors following the UK’s decision to leave the EU continue to be felt. The path of future rates is likely to be even lower for an even longer period, confirmed by the Bank of England’s decision to cut the Bank Rate to 0.25% and indications there could be further cuts to around zero.”
This tallied with figures from Mercer which revealed FTSE 350 DB pension scheme liabilities increased to their highest level ever of £870bn after the BoE cut interest rates from 0.5% to 0.25% and increased its asset purchase programme.
It added despite asset rises, accounting deficits soared to a new high of £149bn on 4 August after increasing £10bn in just five days. Asset values were £721bn – a rise of £4bn compared to the corresponding figure of £717bn at 29 July – and liability values were £870bn, representing an increase of £14bn compared to £856bn at the end of July.
Separate figures from Mercer revealed FTSE 350 DB scheme liabilities increased by £34bn over the last five years despite sponsoring employers paying an estimated £15bn a year to plug deficits.
The consultant said FTSE 350 deficits stood at £98bn at the end of May this year compared with £64bn at the end of 2010, despite £75bn of cash being paid in over the period.
It said funding levels had remained largely unchanged over the period from 88% in 2010 to 87% this year.
Scheme liabilities increased 44% since 2010 against the backdrop of a 10% increase in the market capitalisation of FTSE 350 companies.
Mercer senior partner Adrian Hartshorn said: “Despite many billions of pounds of company contributions, DB pension deficits remain stubbornly high. The high deficits are a result of the increase in the value of pension scheme assets not having kept pace with the rising cost of providing pension benefits caused by persistently low (and falling) interest rates.
“Contributions paid by companies are therefore simply being used to fill an ever increasing gap between the value of the assets and the value of the liabilities.”
