Pension deficits at major UK companies have fallen sharply in the first half of this year, but are still susceptible to bond yield shifts, according to a new report.

Consultancy Barnett Waddingham estimated the aggregate defined benefit (DB) pension scheme deficit for companies in the FTSE350 index was around £35bn (€38.9bn) on an accounting basis at the end of June 2018, down from £55bn at the end of last year. At the beginning of last year the aggregate deficit stood at £62bn.

The £35bn deficit compares to FTSE350 companies’ total pre-tax profits of £210bn, putting the collective deficit at 17% of total corporate profits compared with 70% 18 months ago, according to the firm’s latest report analysing the impact of DB pensions on UK business.

This bucks the trend seen since 2011, where deficits steadily increased as a proportion of pre-tax profits from a low of 25% and hitting a peak of 70% in 2016, the firm said.

Strong investment performance and increased deficit contributions by employers were behind the reduction in the aggregate deficit, according to Barnett Waddingham.

“This is the third year in a row that deficit contributions have increased, suggesting that the FTSE350 companies are stepping up their commitment to paying down DB pension scheme deficits,” it said.

However, the report also found that the average deficit contribution paid by FTSE350 companies as a proportion of dividends remained at 10% in 2017.

The firm speculated that the Pensions Regulator may be concerned that around 43 companies boosted dividend payments while at the same time reducing deficit contributions. 

“However, within this group there will be some companies who agreed to pay higher levels of contributions in the short term, which have now done their job in reducing the DB deficit,” it commented.

“It is only right that they can now return to more normal contribution levels,” the firm added.

Nick Griggs, partner at Barnett Waddingham, said that while the deficit shrinkage was positive news, it would not take much to tip the balance the other way.

“Our analysis suggests that a 0.5% fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE350 DB schemes up to £85bn,” he said.

“With the health of the UK and global economy threatened by a lack of progress with Brexit and the threat of a trade war from Trump’s America First assault, there could a major impact on the size of pension deficits and the ability of FTSE350 companies to pay the contributions needed to clear these,” Griggs warned.

Separately, consultancy Mercer earlier this month released figures quantifying the likely size of UK DB deficits for FTSE350 companies, saying the aggregate pension deficit had more than halved in 2018 so far, improving by a total of £40bn from £72bn at the start of the year to £32bn.

With its figures compiled on a different basis to those from Barnett Waddingham, Mercer included data for July as well as the first half.

In July, both asset values and liabilities had risen and the deficit had increased by £3bn compared to £29bn at the end of June, the firm said.

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