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DEFINED BENEFIT

U.K. corporate pension funding deficits return to pre-Brexit levels — analysis

The combined deficit of U.K. corporate pension funds has returned to pre-Brexit levels, said consultant Hymans Robertson.

On a buyout basis, the deficit of U.K. corporate pension funds was £787 billion ($973.6 billion) on Jan. 20, compared with £1 trillion in late June after the vote for the U.K. to leave the European Union. The buyout basis is how much a scheme would have to pay an insurance company to guarantee its full liabilities.

The firm said the more than £200 billion swing underscores the volatility of these deficits, and the importance of managing risks. It also said the improved deficits could create an opportunity for risk reduction.

The consultant said the primary drivers of a return to pre-Brexit levels are a rise in bond yields due to higher inflation expectations and the depreciation of the pound sterling.

“In aggregate terms for U.K. DB schemes, the two biggest political shocks of last year have canceled out, like matter and anti-matter colliding and exploding in a ball of light,” said Jon Hatchett, head of corporate consulting at Hymans Robertson, in a news release, describing the June 23 Brexit vote and the November election of Donald Trump to the U.S. presidency. “At the scheme level there will be big winners and losers. On the world stage, like the rest of us, U.K. pensioners are all worse off with their spending power overseas having fallen dramatically. On the flip side, those schemes who invested overseas without hedging currency will have seen big funding gains as the pound has dropped.”

However, the consultant warned that despite the improvement in the aggregate DB deficit position since the summer, many companies will face record deficits in 2017 valuations due to low interest rates. “However, obsessing solely on deficits can lead to significant cash calls on sponsors and distract from what is important — ensuring there's a good chance of paying benefits to pensioners in full and that there's a healthy business sponsoring the scheme. A balance needs to be struck,” added Mr. Hatchett.

Separate research by Hyman Robertson's sister company, longevity specialist Club Vita, showed an over-valuation of how long retirees are likely to live is equivalent to overpaying benefits for four months after a participant's death.

Club Vita said the total deficit of U.K. corporate plans could be reduced by £25 billion by using more accurate assumptions on longevity.