Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Here’s another reason for Britain's pro-European millennials to be irritated by British baby boomers who voted for Brexit. Big U.K. employers may have to set aside more cash to top up the gold-plated corporate pensions of Leave-voting over 55-year-olds looking forward to, or already basking in, retirement. Meanwhile, the young face an uncertain labor market, unaffordable housing and zero prospect of a guaranteed retirement income.

The problem arises thanks to the impact of Brexit uncertainty on financial markets. The shock vote has pushed nervous investors into U.K. government bonds. This flight to safety has nudged gilt prices to new highs, depressing yields: the 10-year U.K. government bond now yields less than 1 per cent. This happens to be a key input in valuing company pension liabilities. All other things being equal, falling gilt yields would lead to actuaries putting a higher present-day value on a company's future pension promises.

A Yield in England
U.K. gilt yields have fallen sharply
Source: Bloomberg

Pension consultancy Hymans Robertson says the total value of U.K. pension deficits -- the shortfall between scheme assets and liabilities -- was 935 billion pounds ($1.2 trillion) on June 27, up 14 percent from the Brexit vote days before. The culprit? Falling gilt yields. If the Hymans estimate is right, Brexit fallout will lead in time lead to companies making increased pension contributions to their schemes at the expense of other uses.

Oddly, this isn't showing up in share prices right now. The U.K. blue-chips with the worst pension deficits -- such as BT, BAE Systems and Tesco -- have not performed too badly versus the index. Even investors in pension-laden FTSE-250 stocks don't appear too concerned, according to Credit Suisse research. Shares in Premier Foods, which has pension obligations four times its enterprise value, are actually up since the Brexit vote.

20160701_PENSION

Perhaps investors are fixated on the benefits to U.K. companies of sterling's collapse. They're probably also focused on how pension liabilities will look in annual company accounts. The accounting methodology can be more benign than the triennial actuarial assessment that determines company contributions. It discounts liabilities using long-dated double-A corporate bond yields. Corporate yields include a credit-risk spread over gilts which has widened post-Brexit, off-setting the impact of lower gilt yields.

The Gilt Market Giveth, and Investors Taketh Away
Corporate borrowing costs have fallen even as spreads have widened
Source: Bloomberg

Even so, bond yields are still down. In the real world, the Brexit fallout may stiffen the spine of trustees to demand higher contributions from corporate sponsors. The stock market isn't showing it yet, but investors might soon have new cause to berate the boomers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net