The aggregate funding shortfall across the UK’s biggest listed companies’ pension schemes rose by a third during August’s volatile markets, according to Mercer.

Data from the investment consultancy showed FTSE 350 companies’ defined benefit (DB) schemes had a combined deficit of £67bn (€73.4bn) at the end of August. This marked an increase of £16bn since the end of July – the biggest month-on-month increase this year.

The shortfall was the largest recorded for nearly two years, according to Maria Johannessen, partner and corporate consulting leader at Mercer. She added that under-hedged schemes “took the lion’s share of the deficit hit” as currency market volatility hit the value of sterling.

The combined funding ratio declined less dramatically, from 94% to 93%, as assets rose to £847bn and liabilities reached £914bn. During the month corporate bond yields fell by 0.3%, pushing up the value of fixed income assets but also driving up liabilities.

At the same time, the MSCI World index fell by 1.6% amid geopolitical concerns over the UK’s withdrawal from the EU and the US-China trade dispute.

Charles Cowling, actuary at Mercer, said the decision by UK prime minister Boris Johnson to suspend parliament from next week made a no-deal Brexit look “increasingly likely”.

“Facing a potential sterling crisis and a spike in inflation, trustees and sponsors would be wise to prepare for political volatility and very difficult financial markets,” Cowling said.

“Combined with downward pressure on interest rates, as president Trump increases pressure on the Federal Reserve to cut rates far more aggressively, the months ahead could see serious implications on scheme finances and risk. 

“Trustees will also be looking nervously at to see how employer covenants are affected by a no-deal Brexit. Against a very uncertain backdrop, trustees will have real challenges in making effective decisions. It’s important that they examine the risks they are taking and work through various scenarios to establish whether their schemes face material dangers.

“In particular, trustees should look at the investment risks they are running. Many schemes should consider putting in place pragmatic mitigating measures and investment de-risking at the earliest opportunity.” 

Dutch pension funds were also affected by market volatility in August, making cuts to benefits more likely from next year.