Bond yield fall drives FTSE 350 pension deficit

 
Adam Hignett
THE PROSPECT of quantitative easing (QE) in Europe is already leading to negative side effects as the combined pensions deficit of the FTSE 350 reached a record high at the end of January, according to Mercer.

The deficit was driven by a sharp decline in corporate bond yields last month, rising by £26bn compared to a month earlier to reach the record height of £133bn and leading to speculation the deficit will impact on the balance sheets of companies reporting in March.

The increasing deficit came despite January being one of the best months for asset values in recent times, helped itself by the announcement of QE by the European Central Bank.

That announcement can be seen as a double edged sword, however, as the expectation of QE has pushed down the yields on both government and corporate bonds.

Adrian Hartshorn, senior partner in Mercer’s Financial Strategy Group, said some pension schemes have already significantly hedged interest rates and those which have will be far more insulated from the negative impact on deficits than those which have not yet done so.

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