Maria Johannessen, Partner and Corporate Consulting Leader at Mercer said: “The dramatic fall in liabilities was mainly caused by the significant increase in corporate bond yields. The fall will affect the pension costs companies recognise in their accounts but is unlikely to impact the funding measures used by trustees. These will have experienced substantial worsening over the past month as Government Bond yields did not see the same increases as corporate bonds.”
Charles Cowling, Partner at Mercer, said: “The current economic crisis caused by the coronavirus pandemic is sending shock waves through global financial markets and disrupting international trade and supply chains. Against this backdrop, it may be surprising that pension deficits have turned into surpluses. This is due to the accounting rules on how pension liabilities are measured for company accounts. This does not affect how trustees, or the Pensions Regulator, look at pension deficits.
“The squeeze on interest rates down to record low levels, means pension liabilities as measured by trustees are increasing just as pension assets are falling. 2020 will therefore be a challenging year for actuarial valuations and trustees are urged to start their planning early.
“COVID-19 is also causing more immediate worries for trustees. Some are operational, ensuring pensions can continue to be paid; some are about looking after members’ interests and concerns and, in particular, being vigilant on fraud. However, the greatest concern for trustees is around the strength of company covenants and the ability of employers to maintain payments to schemes at a time of financial distress. The Pensions Regulator (TPR) has published guidance on how trustees should respond to employer requests for deferring contributions payments. Whilst TPR is asking trustees to follow a potentially time consuming and costly process, it is not in anyone’s interests to allow otherwise sound businesses to fail due to a short term cash flow crisis.”
Mercer’s Pensions Risk Survey 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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