Pension deficits at FTSE 350 companies jumped a startling 50% in a fortnight in October, according to research by actuaries at Hymans Robertson.
Most impacted are food processor Premier Foods (PFD), corporate travel firmHogg Robinson (HRG) and trucking company Wincanton (WIN) whose deficits exceeded 50% of their market capitalisations even before October (see Shares, page 20, 18 Sep). Equally, their balance sheets would be beneficiaries if stocks rally and interest rates rise.
The new report shows the sell-off in equities coupled with falling bond yields added £33 billion to the balance sheets of some of the largest UK-listed corporates, taking their aggregate deficit figures to £93 billion.
Most defined benefit schemes invest in equities to meet future pension payments, so any decline in general equity markets reduces those assets. At the same time, defined benefit pension liabilities recorded on company balance sheets are reduced by a discount factor, usually the yield on high grade corporate bonds. When bond yields fall so does this discount factor, meaning the value of the liabilities increases.
Market conditions in October created a perfect storm for businesses with existing deficits.