Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK largest 350 companies increased marginally during March. The estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £102bn - equivalent to a funding ratio of 85% - at 31 March 2014 compared to £101bn - equivalent to a funding ratio of 85% - at 28 February 2014.
Asset values stood at £571bn. This represents a reduction of £1bn compared to £572bn in February 2014. Liability values stood at £673bn which represents no change from February 2014. There has been little change year on year. FTSE350 pension scheme deficits stood at £96bn in 31 December 2013, corresponding to a funding ratio of 85%.
“Asset values fell only marginally during the month despite the immediate negative market reaction to events in Ukraine. This will have come as a relief to many companies with accounting year ends on 31 March 2014,” said Ali Tayyebi, Head of DB Risk in the UK. “Deficits have now remained steady around the £100bn level since September 2013. This might suggest a more stable financial environment but not necessarily a helpful one for those employers looking for positive investment experience to help them make inroads into their pension scheme deficits.”
“Compared to 31 March 2013, accounting deficits are also largely unchanged, increasing from £93bn to £101bn, although this lack of improvement hides the cash contributions made by FTSE350 companies, which we estimate could easily be £10bn. For companies with accounting year ends of 31 March this will mean that, on average, there will be a fairly neutral impact on corporate balance sheets, although the position could vary significantly on an individual basis,” continued Mr Tayyebi.
According to Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group, “Employers need to contend with the Chancellor’s 19 March Budget announcement which creates a period of uncertainty on the options available to manage defined benefit pension liabilities in the longer-term. Although most of the Budget’s headlines related to the welcome news of increased flexibility for defined contribution schemes, the outcome of the consultation now taking place on the future of transfers from defined benefit schemes to defined contribution arrangements could have a material impact on the ability of companies to manage risk in their defined benefit schemes, as well as the choice and flexibility afforded to the members of those schemes.”
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.
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