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IPE special report May 2018

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UK defined benefit pension deficits hit £900bn on 'flight to safety'

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UK defined benefit (DB) pension schemes’ combined deficit jumped by £80bn (€96bn) last Friday morning as a result of the financial markets’ initial response to the previous day’s UK vote to leave the European Union, according to consultancy Hymans Robertson.

The collective UK DB deficit reached £900bn on Friday morning on the back of the referendum result, with liabilities hitting £2.2trn, the consultancy said.

The “record high” deficit level had also been recorded in February, according to Hymans Robertson.

The overnight deficit jump coincided with a spike in demand for Gilts and other assets perceived as safe, and a slump in equities – the FTSE 100 fell by 8.7% on opening.

Sterling hit a 30-year low against the US dollar, with high volatility. 

Commenting on Friday morning, Andy Green, CIO at Hymans Robertson, said financial markets “responded even more dramatically to the result than expected”.

“As is often the case in times of extreme uncertainty and volatility, we expect to see a ‘flight to safety’,” he said.

“Barometers of risk aversion have gone up in value, with corresponding falls in yields – around 25 basis points on nominals.”

Green’s colleague, head of corporate consulting Jon Hatchett, said a poorer outlook for UK GDP growth following the UK’s Leave vote would probably weigh on equity markets and interest rates, putting more pressure on funding deficits.

He warned against a knee-jerk reaction to short-term market volatility but suggested that, “as the dust settles, it may be worth considering whether any changes to [schemes’] investment strategy are required”.

Hymans’ CIO Green said: “Clearly, there is an immediate impact on markets and the funding positions of DB pension schemes, but the full longer-term impact remains to be seen.”

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