August saw a small deterioration in funded status, with the deficit increasing from £32bn to £34bn
Asset values rose slightly but not enough to offset rise in liabilities
2018 expected to be a record for pension risk transfer due to improving funding levels, attractive pricing in the market and uncertainty over Brexit driving risk reduction
At 31 August, the quoted funding level remained at 96%. Liability values increased from £826bn to £829bn due to a fall in corporate bond yields, which was partially offset by a fall in market inflation expectation. Asset values increased slightly by £1bn from £794bn to £795bn.
Alan Baker, Head of DB Solutions Development and Partner at Mercer, said: “The minor deterioration in funded status only partially offsets the huge reduction in the deficit so far this year. However, this is the second consecutive month that the gains made this year have been reversed. It is important that Trustees who run pension schemes should continue to assess how much risk they need to take now to meet their funding requirements.”
Maria Johannessen, a strategic advisor and Partner at Mercer, added: “The small rise in the deficit is not alarming in itself but it does underline the clear need for pension scheme trustees and sponsors to be prepared for changing circumstances. High up on the agenda should be investment risk management and also the challenges of making effective decisions against the uncertain backdrop as we get closer to the date of the UK’s departure from the EU.
Andrew Ward, Head of Risk Transfer and Partner at Mercer, highlighted: “We are seeing unprecedented activity this year in the risk transfer market as sponsors and trustees look to capitalise on their pension schemes moving from “firefighting mode” to a position of financial strength. Improving funding levels and attractive pricing in the bulk annuity market have encouraged pension schemes to explore their options to meaningfully remove or reduce risk for good.
“Additionally, as transfer values remain high, scheme members have become more interested in their benefit options and this has led to further de-risking and reduction in pension scheme balance sheets. However, these favourable conditions may not persist. Our advice is to be aware of your de-risking options and, where possible, be ready to capitalise on good opportunities in the market whilst they are available.”
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