FTSE 350 pensions deficit doubles due to Covid-19 and Brexit

The shortfall was £70 billion by the end of the year, research from Mercer shows.

The defined benefit (DB) pension scheme deficits of the UK’s 350 largest listed companies finished 2020 at £70 billion, research shows.

Mercer’s Pensions Risk Survey data as of December 2020 shows that the accounting deficit of DB schemes among companies in the FTSE 350 rose by £30 billion during the year.

Liability values rose from £815 billion to £914 billion during the 12-month period, according to the consultancy. Asset values were £844 billion compared with £775 billion at the end of 2019.

Charles Cowling, chief actuary at Mercer, says: “2020 was strange and difficult, not to say unprecedented, for everyone as well as for pension schemes.

“Although it could appear there was no major impact on pension schemes, the relatively modest reduction in funding levels hides far more dramatic consequences of a really challenging year for some.”

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Cowling says many schemes had clawed themselves back into an overall surplus since the financial crisis of 2008. But the coronavirus pandemic then struck at a time when a fragile UK economy was also struggling with Brexit.

He warns there has been less of an impact compared with the 2008 financial crisis, but adds: “There has been a big growth in pension liabilities and risk and a big growth in employer covenant risk.”

Joe Dabrowski, head of DB at the Pensions and Lifetime Savings Association, says the pandemic has created further uncertainty for pension scheme managers.

He adds: “Rock-bottom or worse, negative, interest rates in a weaker economy mean many companies are going to find it very tough going for the foreseeable future, and also feed through to the way schemes have to calculate their liabilities, heightening deficits, which in turn require greater employer contributions.”

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In November 2020, retirees were rocked by news that final salary pension schemes had a deficit of £260 billion.

PwC’s Pension Funding Index found the combined deficit of UK defined benefit pensions was £260 billion between September and October 2020.

At the time, PwC said pension schemes needed market outperformance to help eliminate deficits, something that looked increasingly unlikely.