Key points:
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The continued drop off in corporate bond yields since year end has added £43bn to the cost of FTSE350 pension liabilities
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This has been offset slightly by a £15bn rise in assets over the same period
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These falls in borrowing costs have taken the aggregate FTSE350 pension deficit to £104bn*
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Real yields have dropped by 0.25% since the end of 2014
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Benchmark over 15 year iBoxx corporate bond yields reached historic lows on Monday, down over 0.5% since the end of 2015
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For companies reporting at the 31 March 2015 year end, this could have a significant impact on both balance sheets and P&L
Figures released today from Hymans Robertson, the leading independent pensions, benefits and risk consultancy, show that the aggregate pension deficit of UK plc climbed by £27bn from 31 December 2014 to £104bn*. This will be of particular concern to companies reporting in March.
Commenting, Jon Hatchett, Partner and Head of Corporate Consulting, said:
“These figures send a strong message to companies and pension trustees to place greater emphasis on managing the risks in pension schemes.
“Capital market volatility is an inescapable reality. Market sentiment about economic conditions can change very quickly. What we see today is a dramatic turnaround from several months ago, when everyone thought interest rates would rise and the gradual unwinding of QE was on the horizon. To illustrate the point further, 10-year rates were 3% at the start of 2014 and have virtually halved since then.
“As a consequence, funding levels have dropped, which will be of concern to pension scheme trustees, and the costs of liabilities have reached new highs, which will be a worry for sponsoring companies. Corporate balance sheets have been absolutely hammered by a c25% growth in pension liabilities since the start of 2014.
“The picture at the end of 2014 was ugly, but it keeps getting worse. This will now be of greatest concern to the many companies whose year-end reporting falls on 31 March 2015. If we don’t see a recovery, this could have a significant negative impact on balance sheets and P&L. For companies that haven’t hedged sufficiently against this scenario, the picture could look rather grim.”
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