The accounting deficit of defined benefit pension schemes for UK companies increased by £6bn over the month of October, according to Mercer’s Pensions Risk Survey data. Mercer’s data shows that the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of FTSE350 companies stood at £102bn (equivalent to a funding ratio of 85%) at 31 October 2013.
Asset values increased by £13bn over the month from £553bn[2] at 30 September 2013 to £566bn at 31 October 2013. Liability values also increased by £19bn over the month from £649bn at 30 September 2013 to £668bn at 31 October 2013.
“It will come as a surprise to many that despite the visibly strong asset returns over the month, deficits have still increased compared to the position at the end of September. The increase in UK equity values by over 4% helped overall asset values increase by £13bn over the month. However a further narrowing of credit spreads has resulted in an increase in the value places on IAS19 accounting liabilities. Looking ahead, for companies that have 31 December year-ends, the stubbornly high accounting deficits will have a detrimental impact on earnings for 2014,” said Ali Tayyebi, head of DB Risk in the UK.
“There has also been a noticeably different trend between deficits on the IAS19 basis and the trustee funding deficits which pension scheme trustees and sponsors use to determine contributions. The latter are typically driven by yields on government bonds and have generally improved since the end of Q1 of this year. In contrast, accounting deficits have increased principally due to a reduction in credit spreads. The improvement in funding deficits is likely to lead to dialogues between trustees and corporate sponsors on how the improved position can be used to benefit both parties, with options being; reduced employer contributions, shorter recovery periods and/or some accelerated de-risking.”
“With improving funding levels on the trustee funding measure there is an increased focus on locking in some of the gains. Implementation of risk reduction strategies requires careful thought and planning in a market where there is divergence in return prospects for different asset classes,” said Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group.
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.
[1] Deficit calculated taking published accounting information under IAS19 and adjusting for market conditions
[2] Figures restated to reflect updates of previous estimates with the most recent publish accounts.
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