Holes in final salary pension schemes to wipe billions from 2017 City profits

UP TO £2 billion could be lost from the profits of the UK’s leading 350 listed businesses in 2017 as they plug holes in defined benefit pension schemes widened by the knock-on effects of the UK’s decision to leave the European Union.

According to the latest Mercer’s Pensions Risk Survey, record lows in corporate bond yields, caused by the uncertainty following the Brexit vote, means companies will have to contribute 42 per cent of employee pay into pension funds, against less than 10 per cent on defined contribution (DC) retirement savings.

At the end of 2014, this was 29 per cent, and in 2008, just 11 per cent.

“Brexit has introduced considerable uncertainty on how profit will be impacted by DB pension plans after 2017,” said Warren Singer, Mercer’s UK head of pension accounting.

In August, AA rated corporate bond yields as measured by the Markit iBoxx 15 year index plunged to a record low of 1.89 per cent per annum. This is the metric used to measure pension costs, and its reduction is forcing companies to divert funds from elsewhere to prevent an increase in the deficit.

In August, FTSE 350 companies’ combined pension deficit was £190bn, up £50bn in a month.

Mercer analysis of FTSE 350 financial statements shows that the cost of covering accruals in DB schemes was £7.5bn in 2015, however based on current projections for bond yields and retail price index inflation, companies will have to contribute 42 per cent of an employee’s salary in 2017 to cover these accrual costs, an overall contribution of £10.8bn.

After adjusting for closures to future accruals, this 2017 service cost is still estimated to be £2bn more than in 2016.