The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies stood at £70bn (€76.5bn) at the end of 2020, up from £40bn a year earlier, according to an update from Mercer.
Falls in corporate bond yields drove liability values from £815bn at the end of December 2019 to £914bn at the close of 2020, while asset values finished the year at £844bn compared with £775bn.
As at the end of November 2020, the FTSE 350 accounting deficit of DB schemes was £77bn.
“Though 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,” said Charles Cowling, chief actuary at Mercer.
He pointed out parallels between the pandemic crisis and the financial crisis of 2008, but also said there were two big differences: the size of total pension liabilities – now more than twice that in 2009 – and large growth in employer covenant risk.
“So whilst some pension schemes have not been badly hit by the 2020 crisis, others are caught in a perfect storm,” said Cowling, adding that 2021 also brought challenges in the form of possible even lower interest rates and pending pensions legislation and regulatory changes.”
He said one message continued “to be even more important at this time”, namely that trustees should consider looking for every opportunity to take risk out of their pension schemes, whether through better hedging or cash-flow driven investment strategies and/or through liability settlement programmes, including buyouts.
“This might at least result in 2021 being a better year than 2020 has been,” said Cowling.
Mercer pensions risk survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts.
Ostermann to leave UK railways pension scheme investor
Michelle Ostermann has stepped down as managing director of Railpen Investments and will leave the UK railways pension schemes’ £30bn asset manager later this year.
RPMI announced her decision to resign on 30 December, saying she would remain employed by the organisation until 31 May 2021. Her responsibilities will be managed on an interim basis by the investment executive committee, reporting directly to CEO John Chilman, it said.
Ostermann took on the managing director investments role in November 2019 after having joined RPMI as its first chief fiduciary officer earlier that year, from British Columbia Investment Management Corporation.
RPMI said it would provide an update on its permanent succession plan “in due course”.
RPMI CEO Chilman said: “We wish to thank Michelle for the valuable contribution she has made over the past two years.
“More recently as MD, Investments at RPMI, Michelle built a high-quality leadership team with a clear vision and strategy that will continue to successfully invest on behalf of our members. We wish her the very best in her future career.”