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Brexit causes jump in FTSE pension funds deficit

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THE UK’s decision to leave the European Union caused UK pension funds to fall deeper into deficit following a rare return to a surplus earlier in the year, a new report revealed this week.

Now in its 23rd year, the LCP annual report on the pensions market found that by the end of July, the combined deficit of UK pension funds run by FTSE 100 companies had risen to an estimated £46bn, compared to £25bn last year.

In February this year LCP, which analysed 87 FTSE 100 companies for the report, estimated there was a combined surplus. In the run-up to the EU referendum on 23 June however bond yields began falling steadily with the fall deepening following the announcement that the UK would be leaving the EU.

LCP said that the impact of Brexit on FTSE 100 companies’ pension deficits has however been offset by two factors. The fall in the value of sterling meant that assets and earnings in overseas currencies rose in sterling value. And FTSE 100 treasurers had foreseen the potential for Brexit damage and put in place interest rate hedging to counter the impact of falling bond yields.

“Given the magnitude of the reduction in corporate bond yields, and similar falls in government bond yields over the same period, it is fair to say that hedging of interest rate movements via direct (bond) investment or indirect investment has been the single most important strategic move that pension schemes have made in the past 10 years,” the LCP report said.

For most FTSE 100 companies IAS19 liability values rose by between 8% and 12%, with asset values also going up, but generally by less, with the increase for most companies ranging between 5% and 12%.

As an example, LCP estimated that BT Group’s pension deficit would have increased by around £1.3bn to over £9bn in the two week following the referendum.

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