Mercer’s Pensions Risk Survey data analysis shows that the accounting surplus of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies decreased to £5bn at the end of September.
Liabilities fell from £657bn at 31 August 2022 to £605bn at the end of September driven by rising corporate bond yields. Asset values also fell over the period to £610bn compared to £666bn at the end of August, which reduced the impact of the liability falls.
Tess Page, UK Wealth Trustee Leader at Mercer said, “The aggregate funding position on an accounting basis has been incredibly volatile during September, soaring to a surplus of over £100bn last week, before settling at a surplus £5bn at the end of September.
“The catalyst was in gilt markets – notably a surge in yields after the UK Chancellor of the Exchequer’s ‘mini-budget’ was announced on 23 September, which increased speculation of further interest rate hikes to curb inflation amid expectations of increased Government borrowing.”
With many pension schemes prudently managing inflation and interest rate risks with Liability Driven Investment mandates, many schemes faced stress tests on the collateral levels needed to support these investments. The Bank of England stepping in to stabilize the market to a degree, but many schemes were still urgently sourcing cash to shore up collateral buffers. With the headlines focusing on gilt yields, inflation has gone somewhat unnoticed, but by the end of the month there had been a significant rise in future implied inflation expectations, which is currently at its highest level in a decade.
Miss Page added, “There will be schemes that were forced sellers of assets, and funding positions will have been sorely tested.
“To add to trustees’ headaches, the current situation could potentially have implications on the covenant strength of some employers, and their ability to pay contributions, as higher interest rates will mean that borrowing becomes more expensive at a time where they are also facing rising costs and global supply chain issues.
“It is crucial for trustees and employers to take stock of where they are and consider what future scenarios may unfold, and what contingency plans are in place through their integrated risk management frameworks, to manage risk.”
Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension scheme liabilities, with analysis focused on 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. Data published by the Pensions Regulator and elsewhere tells a similar story.
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