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Pension deficit rate of rise slows but experts warn this isn't the end of problems

Oliver Gill
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Waving From Signals
One rung at a time: PwC advocated an incremental approach to managing pension deficits (Source: Getty)

The meteoric rise in pension deficits abated during September with aggregate levels stagnating for the first time since the Brexit vote.

Deficits have leapt since Spring after asset value growth failed to keep up with the rate at which bond yields have collapsed.

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However, according to data prepared by JLT Employee Benefits, the aggregate deficit levels stablised in September.

"This last month has seen a very slight easing of deficits from the record heights of over £500 billion reported at the end of August," said JLT Employee Benefits director Charles Cowling.

Aggregate pension deficits – JLT Employee Benefits
FTSE 100 Companies £185bn £182bn
FTSE 350 Companies £210bn £207bn
All UK Private Sector Pension Schemes £503bn £502bn

Nevertheless, Cowling said that the current deficit levels were very concerning and painted a gloomy picture for UK companies.

"Inevitably there are going to be demands for some massive hikes in contributions and the question has to be asked, can UK plc afford its own pension liabilities?" he said.

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Cowling's comments come only days after actuarial consultants Mercer suggested that servicing pension deficits could have a material effect on companies profits and estimated that the bottom lines of FTSE 350 firms could be adversely impacted by an aggregate of £2bn next year.

"Forcing companies to guarantee pension promises made many years ago when market conditions were different is going to result in dividends being scrapped, share prices falling, and worse still, companies going bust," said Cowling.

Accountancy giant PwC revealed a similar trend on Friday. Its Skyval index – which includes a broader number of companies, around 6,000 in total – concluded that accounting deficits had not changed during September. Its analysis had also previously seen large increases in aggregate deficits.

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But PwC's pension leader Raj Moody warned against knee-jerk reactions to the near record level deficits.

“There is a need to be prudent, but it is not in everyone’s interests to be over-prudent. It's like climbing a ladder – there is no point in aiming to climb higher than you need nor trying to climb too fast. If you try and step two rungs at a time you risk missing your footing and falling several rungs.

"The same could apply for a pension funding targets - it is usually better to aim for the right target and get there in a measured way, as that could lead to a safer outcome sooner," he said.

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