Rate cut causes a £10 billion spike in pension deficits

Pension deficits grew by £10 billion (€11.7 billion) among FTSE 350 companies just five days after the Bank of England’s Monetary Policy Committee voted to cut interest rates from 0.5% to 0.25%.

According to data from pension specialist Mercer, the aggregate deficit increased from £139 billion to £149 billion in the five days since the rate cut.

Although asset values increased by £4 billion to £721 billion, this was offset by an increase in liabilities of £14 billion. Both pension liabilities and deficits reached a record high on August 4 2016, the highest level since Mercer started monitoring deficits on a monthly basis.

“This sudden increase reminds us that it is the outlook for future long-term secure investment returns which drives pension scheme deficits - much more than the short term performance of assets,” said Ali Tayyebi, senior partner in Mercer’s retirement business.

He added that although asset values are around 12% higher than a year ago, the ratio of assets to liabilities has reduced from 89% to 83% and the deficits have increased from £81 billion to £149 billion over the same period.

 Le Roy van Zyl, senior consultant in Mercer’s financial strategy group, said: “The aftermath of the vote for Brexit is still having a significant impact. The Bank of England’s actions should help to support economic activity, but whether the economy is going into recession is still unclear.”

Mercer said its data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. It added that data published by the pensions regulator and elsewhere tells a similar story.

©2016 funds euope