On the go: The accounting deficit of defined benefit schemes for the UK’s 350 largest listed companies finished the year at £70bn, almost double the deficit of £40bn at the end of 2019, according to Mercer’s Pensions Risk Survey.
While liability values rose from £815bn in 2019 to £914bn at the end of 2020, driven by falls in corporate bond yields, asset values increased to £844bn compared with £775bn at the end of 2019.
According to Charles Cowling, chief actuary at Mercer, 2020 “was strange and difficult, not to say unprecedented, for everyone as well as for pension schemes”.
“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,” he noted.
Mr Cowling explained that while some schemes have not been badly hit by the 2020 crisis, others are caught in a perfect storm.
“They have seen a big growth in pension liabilities and risk, and a big growth in employer covenant risk,” he said.
“At the same time, the Bank of England is suggesting even lower interest rates this year and new pensions legislation pending with the Pensions Regulator rightly encouraging trustees to focus on their long-term plans for low-risk sustainability — something that will seem very far off for many trustees.”
Mr Cowling believes 2021 brings many challenges for pension scheme trustees. But one message continues to be even more important at this time, he noted, adding that these professionals “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,” he concluded.
