DB Pension Deficits at Risk of £25bn Increase due to Market Volatility
The combined defined benefit (DB) pension deficits of the FTSE 100 run the risk of an increase of over £25bn within one month, according to a new report published by pension risk analysts PensionsFirst. Over a year, this could result in an increase of around £100bn in the total deficit, potentially taking the deficit to over £140bn (the current deficit stands at £43.5bn across the FTSE 100). According to the report, however, the main risk for the UK’s largest companies is the fact their exposure to market volatility remains unhedged.
“For several years the media and the pensions industry have focused on pension deficits, but we believe the real issue is the volatility that sits beneath the headline numbers, and in publishing the PF Risk Report we are seeking to shift the debate to the far more important issue of risk,” said PensionsFirst Analytics chief executive officer (CEO) Benjamin Reid. “This is a serious issue for all stakeholders – including pension scheme members and shareholders – because unhedged pension liabilities can result in significant exposure to market-directional risk.”
The report indicates that many UK companies (not just those in the FTSE-100) are running market exposures similar to hedge funds alongside their core business. However, unlike hedge funds, which are specifically mandated by their investors to take market exposure, most companies are ill-equipped to manage the high levels of financial market volatility embedded in their pensions schemes and shareholders typically have little information on the risks to which they are consequently exposed.