02 October 2009
Published in: Investment risk, Market risks
FTSE 350 pension deficit reaches £140bn
Mercer reports that FTSE 350 pension scheme funding deficits on a company accounting basis continue to increase despite the equity market revival, as credit spreads start to fall back from recent record highs.
The FTSE 350 aggregate pension scheme deficit at 30 September 2009 was estimated at £140bn, corresponding to an overall funding level of 77%. And even if the recent rally in equity markets is sustained, a continued correction of corporate bond spreads to pre-crisis levels could add a further £60bn to the deficits.
According to Mercer, when the present financial turmoil became apparent, AA corporate bond spreads increased from levels of under 1% in early 2007 to record levels of almost 3% early in 2009 as investors demanded higher returns to compensate for illiquidity and the greater risk of corporate defaults. This had the effect of reducing disclosed pension liabilities in companies' books.
Now that fears of widespread corporate defaults seem to be receding, said Mercer, AA corporate bond spreads have fallen back to under 1.5%. The resulting increase in pension liabilities has more than offset the benefit of the 20% increase in global equity markets over the last quarter.