The total deficit of all private-sector pension funds in the U.K. increased 10% in June and 41.5% over the year ended June 30, to a record £341 billion ($465.5 billion) said JLT Employee Benefits.
In its monthly index update, the consultant said total assets for those pension funds increased 6.1% to £1.34 trillion, and were up 9% in the year to June 30. However, liabilities also increased, by 6.9% over the month, and by 14.4% over the year, to total £1.681 trillion. The funded level remained steady at 80% vs. May 31, but dropped from 84% at June 30, 2015.
FTSE 100 company pension fund deficits increased 17% for the month to £117 billion, and by 56% over the year. The funded level dropped to 83% at June 30, vs. 85% at May 31, and 88% at June 30, 2015.
The deficits of FTSE 350 company pension funds also increased, by 17.5% over the month and 55.8% over the year, to a total £134 billion. Funded levels dropped to 83% at June 30, from 85% at May 31, and 88% at June 30, 2015.
“Equity markets may have recovered since last week's vote to leave the EU but conditions are getting even more challenging for pension schemes, with even lower interest rates and prolonged uncertainty in the markets,” said Charles Cowling, director at JLT Employee Benefits, in a statement accompanying the data. He was referring to the June 23 referendum vote, which resulted in a 52% call for the U.K. to leave the European Union. “Companies with actuarial valuations this year, and those adversely affected by the Brexit vote, will be hardest hit. Trustees may have little option but to demand significant increases in cash funding from companies.”
However, Mr. Cowling said worsening pension fund deficits will not be universal, since many have already moved to match assets to liabilities to try to protect themselves against adverse bond yield moves. “The big question for those pension schemes that have little or no protection is whether they want to increase interest rate protection now that rates have fallen further to record lows. Instinctively, it will be difficult for trustees and companies to hedge interest rates at current levels when they have so far held off doing so in the hope of interest rate rises - and have seen spiraling pension deficits as a result.”
However, Mr. Cowling acknowledged signals from Bank of England Governor Mark Carney that interest rates may be cut over the summer due to a worsening outlook for economic growth.