UK pension deficits worryingly high after Brexit, says Citi

UK pension deficits worryingly high after Brexit, says Citi

  • Export:

Pension liabilities and deficits are “worryingly high” among FTSE 350 firms after Britain’s vote to leave the EU.

Data from UK actuarial firm Mercer show liabilities, the difference between plan assets and plan obligation, hit a record high of £813bn after the Brexit vote - £52bn higher than May.

Deficits, where the potential liabilities of the scheme are greater than the assets, increased by £56bn to £118bn during the second quarter.

“UK and European pension funds have become one of the victims of the recent Brexit vote,” said Citi equity analyst Tian Cao in a recent note to clients.

“Investors are concerned that more companies are in danger of going bust as a result of their pension liabilities.”

The total FTSE 350 pension liabilities as percentage of total market cap stood at 40% at end of the second quarter.

Citi’s Cao says this is a record high over the last ten years except the global financial crisis period.

“We expect large pension liabilities and deficits will stay high if interest rates don’t pick up,” he adds.

In this case, the analyst says companies might eventually be forced to take action to address the issue by increasing pension fund top-ups.

“This implies extra cash to divert into pension schemes, less investment capital to help business grow and possibly deterioration in credit ratings.”

Citi’s research shows IAG, Go-Ahead, FirstGroup, StageCoach, Tesco, Carrillion, Balfour Beatty are among the companies with the largest liabilities and deficits.

Last month, Bank of Ireland announced that its pension deficit had grown 62% since last year-end to around €1.2bn, driven mainly by falling AA Corporate Bond yields.

Citi expects other pension funds will be negatively impacted for the same reason.

Meanwhile discount rates, which reflect what the plan's assets can reasonably be expected to earn over the long term, have fallen significantly recently.

Although Citi argues these rates are not yet reflected in the pension liabilities and deficits numbers disclosed in companies’ annual reports.

FTSE 350 company pension schemes now hold 22% in equities (vs 30% in 2015) and 39% in bonds (vs 47%).

There has also been an increase in allocation to “other” investments, such as property, derivatives, hedge funds and cash.


  • Export:

Related Articles