Last week, the Bank of England threw the kitchen sink at the UK financial system in an attempt to stave off any Brexit related economic turbulence by cutting the bank rate by 0.25% and unleashing a wave of new QE as well as lending programs.
After hearing the news, 10-year gilt yields immediately fell to new time lows, the pound weakened, and risky GDP denominated assets inched higher. The most part, the market had been pricing in the rate cut since the end of June, and the price action in the gilt market was relatively expected.
Nonetheless, such significant monetary easing is making life hard for defined benefit pension schemes, a theme HSBC’s strategist Theologis Chapsalls explores in a credit market research note sent to clients at the end of last week.
The UK’s post-Brexit pension crisis is getting worse
Based on the estimates of yield/equity sensitivities published by the UK’s Pension Protection Fund, Chapsalls estimates that the aggregate assets and liabilities of the companies in the 7800 index have moved to £1,400 billion and £1,832 billion respectively, implying a deficit of £432 billion. If these figures are correct, it suggests the UK’s pension deficit has exploded by almost £50 billion from the all-time high deficit, which was only printed at the end of June.
HSBC isn’t the only outfit warning about the state of UK Plc’s pension. According to the financial services company Mercer, the UK’s top 350 listed companies have suffered an increase in the deficits of their defined benefit pension schemes over the last five years of around one third in relation to their market capitalization. Figures show that the shortfall in pension assets now stands at 40% of listed companies’ market value compared with 30% of the end of 2010, that’s despite contributions of £75 billion. In comparison, over the same period, the market capitalization of the companies in the study only increased by 10%. These figures only go up to the end of May 2016, so the worst of the yield carnage, which has taken place over the past few months is yet to be reflected in the figures.
More recent figures from Mercer show that the pension deficits for Britain’s 350 largest listed companies increased from £119 billion to £139 billion during the month of July alone. The survey also underlined the fact that the deficits of the same 350 companies have jumped 40% since May of this year.
Data from the UK’s Pension Protection Fund should reveal how dangerous the situation has become for the UK’s defined benefit pension schemes this week.