UK companies reporting annual results for the year to March are expected to report an increase of more than £100bn in their aggregate pension scheme deficits, according to actuarial forecasts.
This year’s reporting season is likely to expose larger, not smaller, pension shortfalls than existed a year ago, despite sharp rises in stock and bond markets where retirement schemes have invested their assets.
That is because investors, including pension schemes, have piled into corporate bonds in recent months, seeking higher yields than those on risk-free debt.
The effect of all that buying has driven down yields on high-quality corporate debt that are used to calculate corporate pension liabilities that show up on company balance sheets. The lower the interest rate used to discount the value of future pension promises, the higher the current level of liabilities.
Actuaries at Buck Consultants estimate that aggregate deficits will increase by more than £100bn across all UK pension schemes when these are revealed on corporate balance sheets this year.
Of the largest UK employers, Royal Dutch Shell, BT Group, Lloyds Banking Group, BP, Royal Bank of Scotland and BAE Systems had the largest pension liabilities at the end of last year, according to a report from JLT Pension Capital Strategies.
The effect is likely to be particularly acute for company schemes that are still heavily invested in equities and other risk assets rather than bonds. Those largely invested in bonds will still see liabilities grow, but their assets are likely to have grown by enough to offset them.
“Too many companies continue to take massive bets in their pension funds which they would not dream of taking in their treasury department,” said John Ralfe, an independent pension consultant who has long warned of the dangers of mismatching assets and liabilities. “Too many companies act as though a pension deficit can be plugged by holding equities and hoping for the best.”
Because pensions build up over long periods of time, even small moves in rates can have a big effect on liabilities. Adrian Hartshorn, senior partner at consultants Mercers, said a 0.10 percentage point move down in bond yields adds about £2m to every £100m of pension liabilities. “We estimate that the FTSE350 aggregate pension liabilities of £630bn have risen by £13bn,” he said.
However, some pension consultants said the damage could be more cosmetic than anything else, because it was unlikely to force companies to increase their contributions to their pension schemes.
The Pensions Regulator, which oversees the rate at which companies must repair their shortfalls, does not use accounting standards when considering how quickly employers should make good on shortfalls.
Moreover, in relative terms, bond yields are not that low. “Corporate bond yields are still a lot higher than gilt yields,” said Charles Cowling, principal at JLT.

via UK pension deficits set to rise by £100bn – FT.com.