The UK’s top 350 listed companies have suffered an increase in the deficits of their defined benefit (DB) pension schemes over the last five years of around one-third in relation to their market capitalisation, with the shortfall in assets now standing at 40% of their stock-market value compared with 30% at the end of 2010.

In an analysis based on information from FTSE 350 companies’ annual accounts, Mercer said pension liabilities had ballooned in the past five years, with the value of the DB scheme liabilities increasing by 44% since 2010. 

In contrast, the market capitalisation of the companies has only increased by 10% over the same period.

Adrian Hartshorn, senior partner at Mercer and leader of the firm’s UK Financial Strategy Group, said: “Despite many billions of pounds of company contributions, DB pension deficits remain stubbornly high.”

Even though companies contributed an estimated £75bn (€88bn) of cash to their DB schemes over the period – equivalent to almost 5% of the value of the liabilities – deficits rose to £98bn at the end of May 2016, with a funding level of 87%, from £64bn at the end of 2010, with a funding level of 88%.

Hartshorn said the high deficits were a result of the increase in the value of pension scheme assets not having kept pace with the rising cost of providing pension benefits caused by persistently low – and falling – interest rates. 

“Contributions paid by companies are therefore simply being used to fill an ever-increasing gap between the value of the assets and the value of the liabilities,” he said. 

“Add to this the impact of people living longer and a range of other costs, and it is easy to see how contributions are simply swallowed up.”

For the outlook to become more positive for UK pension schemes, interest rates will need to rise more quickly than markets expect, Mercer said.

On top of this, equity markets and other growth asset classes will have to perform strongly over a long period, and the improvements in life expectancy seen over the last 20 years will need to slow down, it said.

“If one or more of these elements fails to materialise, then pension scheme deficits – and the cash contributions required to fund them – are likely to worsen,” the firm said.

Mercer noted that its research did not allow for the impact of the UK referendum outcome.

Last week, the UK’s Pensions and Lifetime Savings Association (PLSA) called on the Pensions Regulator to take a proportionate and flexible approach to scheme funding, after monetary easing by the Bank of England sent defined benefit (DB) deficits to new highs.

The Bank of England cited the weakening in the UK’s economic outlook following the Brexit vote in late June as one of the reasons behind its decision to cut rates and extend its quantitative easing programme.

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