The collective DB pension deficit for the FTSE350 jumped from £63bn on 30 September 2014 to £96bn on 15 October 2014, essentially a 50% jump in two weeks, says Hymans Robertson, the leading independent pensions, benefits and risk consultancy.
Commenting, Jon Hatchett, Head of Corporate Consulting at Hymans Robertson, said: “A combination of equity market falls and a drop in gilt yields over the last month has had a detrimental impact on pension scheme funding, taking us taking us back to funding levels seen in the summer of last year. A typical scheme will have seen their funding level drop by around 5 and 10% since the beginning of September. The collective FTSE350, despite paying in cash contributions of c£15bn in the last year, has ended up in a worse position than it was 12 months ago.
“The impact of bond yields on liabilities has had a greater effect than recent equity market falls, although clearly both have contributed to the overall worsening. This highlights the need for companies to take a slow and steady approach to funding pensions, with limited exposure to investment risk.”
Equity markets have had a difficult September and early October with the FTSE 100 index down from a high of nearly 6900 to around 6200 in the last few days (a fall of around 11%). This general trend has been repeated across global markets. This has been coupled with a fall in gilt yields over the last month of around 0.3%. Pinpointing the exact cause of these moves is difficult, but a likely suspect is a swing in sentiment given a combination of a global economic slowdown, regional conflicts, the Ebola outbreak and political instability.
Jon Hatchett added: “The short term outlook remains unclear and, in these instances, markets often overshoot. We would not recommend knee jerk reactions to short term market moves. Pension scheme funding is a long term process and the recent falls will not necessarily have knocked the scheme off the long term track. However, the greatest concern will likely be for companies who have schemes nearing a valuation.
“All funding plans that involve long term growth will expose schemes and sponsors to short term volatility on the way. This is why we view it as critical that sponsors and trustees take a three dimensional view of considerations. Companies should put as much emphasis on potential volatility cash demands as the current level of agreed contributions and the level of return targeted from the assets.
“In environments such as this, daily online monitoring of scheme funding and forward-looking risk analytics are essential tools for managing schemes.”
|
