Pension deficits have almost doubled over the last 12 months due to ongoing market volatility sparked by Britain’s vote to leave the EU, posing serious threats to companies’ balance sheets and their ability to pay dividends, according to JLT Employee Benefits.
“As we rapidly approach the all-important year-end, at current market levels many companies’ accounts are going to show a marked deterioration in their year-end pension numbers,” said Charles Cowling, director at JLT Employee Benefits.
For UK private sector pension schemes, deficits have soared from £265bn to the period ending November 2015 to £414bn in the same period this year. For FTSE 350 companies, deficits have risen from £96bn to £181bn in the same period, according to JLT Employee Benefits.
"There will be instances where the pension scheme will represent a serious threat to the company’s balance sheet and, in some cases, its ability to pay dividends," Cowling said.
"There are going to be many finance directors hoping that the recent rise in bond rates continues a little further before the end of 2016.”
Despite a slight easing in pension deficits last month, from record highs of over £500bn recorded at the end of August, markets continue to react to the fall-out from Brexit and the US election, signalling further trouble for companies with large defined benefit pension schemes.
Britain’s vote to leave the EU in June presented immediate problems for UK pension funds, after the government cut interest rates and reopened its bond-buying programme in July. This caused gilt yields to plummet, further worsening pension funding gaps.
“Following this weekend’s Italian referendum there are still critical elections to be faced in France and Germany next year,” Cowling said.
“The outcome of these events has the potential to destabilise markets – and there is the prospect of a hike in inflation next year as the impact of the fall in the value of sterling flows through to prices.”