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Pension deficits increased to a record level of £189bn despite asset rises over the month
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Pension liabilities continue to balloon and reached £926bn at the end of August
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Corporate bond yields continue to fall following BoE announcement of Quantitative Easing expansion
At 31 August 2016, asset values were £737bn (representing a rise of £20bn compared to the corresponding figure of £717bn at 29 July 2016), and liability values were £926bn, representing an increase of £70bn compared to the corresponding figure of £856bn at the end of July. Both Pension liabilities and deficits reached a record high at the end of August, the highest level since Mercer has monitored deficits on a monthly basis.
“Despite an increase in asset values over the month, August saw the biggest monthly rise in deficits since records began,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business.“This was largely driven by a further sharp fall in long dated corporate bond yields. This also means that our reference long-dated corporate bond yield has now fallen below 2% pa for the first time representing yet another milestone into uncharted territory.”
Le Roy van Zyl, Senior Consultant in Mercer’s Financial Strategy Group, said, “The seemingly relentless march in pension scheme deficit increases continues. Depending on the specific situation of the pension scheme and its sponsor, these numbers will have to be dealt with. The first key question to address is how much deficit contributions should the sponsor be paying, recognising the security needs of the pension scheme as well as the appropriate alternative uses for this cash. Another key question is how much risk should currently be run; on the one hand, can the scheme and sponsor afford conditions to deteriorate further, but on the other; what is the opportunity cost if risk is reduced now and markets improve from here on out?”
Mr van Zyl continued “There are few easy answers here, apart from the obvious one that any action, including ‘no action’, should be carefully considered amongst the key stakeholders. Letting things drift can be just as dangerous as taking knee-jerk actions.”
Mercer’s data relates 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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