Xafinity Consulting’s corporate pension deficits tracker jumps £54 billion in October reversing September’s downward trend and bringing corporate deficits back up over £500 billion. The minor rally in the FTSE which ended the month at 5849 was insufficient to quell the increased liabilities due to bond markets pricing in an extra 0.25% increase in RPI.
Source: Xafinity Corporate Pensions Scheme model, based on all UK DB pensions and using FRS17 and IAS19 accounting rules
With the government consulting on whether to change the formula used for RPI, and the potential for a possible 1% drop, the outlook remains deeply uncertain. That 1% drop would reduce the aggregate deficit by as much as £200 billion. But, Xafinity warns that the bond market may already be starting to price in the potential changes. How much of that £200 billion to credit to corporate balance sheets will be a very significant judgement call.
Hugh Creasy, Director at Xafinity Corporate Solutions, said: “With the outlook for RPI still uncertain, finance directors should ensure their actuary and their auditor understand the issue and agree how to deal with it. There is no objective answer to what bond investors are pricing in for the RPI formula. Despite all of the details within the accounting requirements, and the technical analysis within the audit process, this judgement call will dwarf any other decisions. With many schemes having de-risked their exposure to equities, the key assumptions for scheme liability measurements - such as price inflation - are the real drivers for scheme deficits.”
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