UK’s pension black hole grows by £120bn in the space of six weeks, as equities fluctuate ahead of EU referendum

The combined black hole in the UK's pension schemes expanded by more than £100bn in the space of just six weeks, research out today has found.

The analysis by Hymans Robertson revealed that the total deficit of the UK's defined benefit (DB) pension schemes rocketed by £120bn, or roughly the equivalent of five per cent of GDP, over the course of six weeks to reach £850bn last Thursday, thanks partly to Brexit uncertainties shaking up equities.

"Companies are being hit hard by pension deficits," said Jon Hatchett, partner and head of corporate consulting at Hymans Robertson. "While the large majority of companies are currently strong enough to support these schemes, recent high profile cases such as Tata and BHS bring the risks into the spotlight.

"Volatility in funding levels means surprises for sponsors about how much cash they'll need to contribute to shore up schemes. It also puts the security of pensions promised to workers at risk."

"The reality is DB schemes are more prone to volatility than they need to be. Events of the last week are not unique from a pension funding perspective. Back in February we saw the collective UK DB deficit hit its highest ever level at just over £900bn. This was followed by another swing of more than £100bn in a six-week period, from mid-February to the end of March."

Fortunately, recovering markets have since helped the combined deficit to deflate £30bn, but the findings show just how vulnerable the markets have been in the run up to the referendum.

Commenting on Hymans Robertson's findings, Darren Redmayne, head of Lincoln Pensions, told City PM:

Brexit fears have resulted in a double whammy for DB schemes – their assets have fallen in value owing to the market jitters and their liabilities, priced typically using bond yields, have risen.

The key question here is whether the sponsoring companies standing behind these schemes have the covenant strength to withstand the additional deficits or whether we will see more BHS and Tata situations.

Vivek Paul, director, client solutions at BlackRock, added:

In the run up to the referendum, the risk-off sentiment saw pension schemes hit by a double whammy of falling equity values and rising liabilities.

In the first few weeks of June alone, typical scheme liabilities could have increased by four per cent as long-dated market interest rates fell, while European equities dropped by over five per cent.

Pension schemes without appropriate liability driven investment strategies would have seen a material deterioration of funding levels in this period.