Concerns that the outbreak of COVID-19 (coronavirus) would not be able to be contained sent the FTSE 100 index down by 13% in the final week of February. The BBC reported that in the space of that week the value of companies in the index fell by £210 billion. It was a similar story in equity markets overseas, although at the time of writing there has been some recovery in reaction to supportive signals from central banks.
We estimate that the impact on FTSE 100 IAS 19 accounting funding levels was closer to 2%. There are various reasons for this. Most importantly, UK pension schemes have greatly diversified their assets. The most recent Purple Book published by the Pensions Regulator shows that the proportion of UK defined benefit pension scheme assets invested in equities has declined from 61% in 2006 to 24% in 2019. This means that a straight 13% fall in equity values would translate into a 3% fall in accounting funding levels, if everything else remained unchanged.
However, the equity market does not live in a bubble, and so other market conditions vary too. Key for accounting funding levels is the change in AA-rated corporate bond yields. These drive the value placed on the IAS 19 accounting liabilities of these pension schemes. Over the final week of February these corporate bond yields edged up slightly. The increase was less than 0.1% per year, but that is enough to reduce the impact on accounting funding levels from 3% to around 2%. Overall, we estimate that the FTSE 100 accounting funding level changed from 98% to 96% over that week. That’s still a large amount in cash terms: around £15 billion; but a lot less than £210 billion.
Clearly this is just this start of the impact of COVID-19, whether that’s on markets or on people or on individual businesses. As the spread of this virus continues we can, as a minimum, expect more volatility in the months ahead.