• Pension scheme accounting deficits for FTSE350 companies were £68bn at 28 February 2013, corresponding to a funding ratio of assets over liabilities of 89%.
• Positive month for equity values meant that deficits overall reduced, despite a continued increase in liability values.
• Over the month pension deficits reduced by £7bn (compared to a deficit of £75bn as at 31 January 2013). As at 31 December 2012 pension deficits stood at £62bn (corresponding to a funding level of 89%).
Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes in the UK reduced over the month of February. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of FTSE350 companies stood at £68bn (equivalent to a funding ratio of 89%) at 28 February 2013. This compares to a deficit figure of £75bn at the end of January 2013 (funding ratio of 88%). However, the ‘improvement’ in the funding level relative to the position at 31 January 2013 just reverses the increase in deficit that occurred during January.
Asset values increased from £535bn as at 31 January 2013 to £544bn as at 28 February 2013. Corporate bond yields and the market’s view of long term inflation both reduced marginally and the net effect of this was a very small increase in total liabilities from £610bn as at 31 January 2013 to £612bn as at 28 February 2013.
“The strong rally in equity markets over the last two months has finally resulted in the first reduction in deficit month-on-month since September 2012. Many will have been disappointed that this did not come through in January. However, the asset value impact of January’s strong month for equity returns was offset by the ONS announcement on 10 January which resulted in an immediate step increase in the market’s view of long-term RPI inflation, with a corresponding increase in liability values. The position at the end of February does however mask volatility in the position over the month, reflecting the persistent financial uncertainty affecting much of the globe. During a month which saw renewed political uncertainty in Italy, as well as the downgrading of the UK’s credit status, deficits ranged from a low point of £64bn to a high point of £78bn. One of the key questions now exercising the minds of many pension scheme trustees is how to consolidate some of the improvements in asset value from their more risky assets when the price of the safer gilt assets still remain so high despite the downgrading of the UK’s credit status last week.” said Ali Tayyebi, Head of DB Risk in the UK.
“It is important to recognise the objectives of both corporate sponsors of defined benefit schemes and trustees. Notwithstanding the fall in deficits over February, investment markets and the general economic environment continue to be very challenging. However, it is possible to create win-win outcomes for sponsors and trustees by understanding the sponsor covenant and reflecting the value within funding and investment decisions. This may result in alternative, potentially less onerous, funding and investment strategies to be adopted which support the long term growth of the sponsor’s business and the long term health of the scheme,” said Adrian Hartshorn, partner in Mercer’s Financial Strategy Group.
“There is of course significant interest in the ongoing issue of the size of pension scheme deficits which some commentators have attributed to the falls in interest rates, driven at least in part by Quantitative Easing. The Department of Work and Pensions is currently seeking input through a ‘call for evidence’ on the smoothing of assets and liabilities in actuarial valuations and on adding a statutory objective for the Pensions Regulator to consider employer affordability when assessing valuation outcomes. Mercer believes that the current legislative regime has sufficient flexibility to address the Chancellor’s concerns - the Regulator’s current objectives already require it to take into account the sponsor’s ability to finance the scheme and remain a strong sponsor. However, we believe that the Regulator’s statements and actions generally encourage de-risking and so may limit the flexibility trustees and sponsors feel that they have in agreeing how to finance the scheme. To support the win-win outcomes, we believe that the Regulator needs to revisit the current stance it takes around how it achieves its objectives and provide a better balance between continuing growth of the employer’s business and ensuring that schemes are properly funded,” continued Mr Hartshorn.
Mercer’s data relates only to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by the Pensions Regulator and elsewhere tells a similar story.
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