This report discusses the recent credit trends observed in UK pension funds, using credit risk data contributed by global IRB and CCAR-regulated banks.
UK pension funds appear to face a long-term deficit. The PwC Skyval Index, based on data from 5,800 UK defined benefit schemes, reports UK pension fund assets of £1.6trn against liabilities of £2trn. This deficit is fueled by low yields on gilts, (the majority of pension investments), low annuity rates and increasing life expectancy.
The pension scheme deficit as a proportion of UK plc profits is now higher than in the aftermath of the financial crisis. Barnett Waddingham has found that the aggregate pension deficit of the UK’s top 350 companies grew by £12bn in 2016 to reach £62bn, equivalent of 70% of pre-tax profits.
Some of the companies with the highest deficits have taken radical steps to tackle the issue. British Airways, which has the largest of all UK company pension deficits relative to the company’s overall financial value, has recently announced plans to close the larger of its two final salary pension schemes.
Exhibit 1 shows trends in credit risk of around 150 quorate and semi-quorate* UK pension funds.
Exhibit 1 Credit Quality Improvement and Deterioration in UK Pension Funds+
This shows that the banks contributing to the Credit Benchmark data universe have reported a steady increase in UK pension fund credit risk. The percentage of funds with deteriorating credit quality significantly overweighs the percentage of entities with improving credit quality in 9 out of 10 of the reported periods.
*Quorate entities have observations from 3 and more banks, semi-quorate entities are entities with observations from 2 banks.
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