The ability of FTSE 350 companies to fulfil their defined benefit (DB) obligations has dropped to its lowest level since the financial crisis, according to research by PwC.
Analysis from the professional services network suggested the support the UK’s largest companies provide their pension schemes is at its weakest since 2009.
PwC’s Pensions Support Index tracks “the relationship between the financial strength of FTSE350 companies and their defined benefit pension obligations, indicating the overall level of employer support offered to these pension schemes”.
It has rated the companies at a score of 69 out of 100 for 2017 – a 13 percentage point drop over the last 12 months. The biggest factor pressuring scheme deficits is rising liabilities due to the fall in long-term gilt yields, PwC said.
Those businesses that did not hedge their interest rate risk have not been able to cope with falling yields and have seen their deficit valuations go up, it added.
PwC senior economic adviser Andrew Sentance said: “In some advanced economies, interest rates are already starting to increase, led by the US Federal Reserve.
“In the UK, however, concerns over Brexit are likely to lead to the current low interest rate environment remaining lower for longer. This will continue to impact schemes in the short to medium term.”
His colleague Sinead Leahy, a pensions investment partner at PwC, suggested now was the time for pension funds to review their investment strategies.
“In this low-yield environment, pension funds need to review their investment strategy,” she added. “Having a focus on cashflow-matching assets that have good returns can both help to reduce risk – by providing a better match for scheme liabilities – and repair deficits.”
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