Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for UK companies remained unchanged over the month of September. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of FTSE350 companies stood at £98bn (equivalent to a funding ratio of 85%) at 30 September 2013.
Asset values increased by £4bn over the month from £548bn at 31 August 2013 to £552bn at 30 September 2013. Liability values also increased by £4bn over the month from £646bn at 31 August 2013 to £650bn at 30 September 2013.
“On the surface, it appears that September was a picture of calm with the FTSE100, long-term corporate bond yields and the market’s view of long-term inflation expectations all broadly unchanged from 31 August to 30 September. However this hides the fact that a combination of rises in the stock market and rises in long-term bond yields had reduced the deficit to around £78bn on 11 September.” said Ali Tayyebi, head of DB Risk in the UK. “More schemes now monitor their funding positions on a regular basis. The significant improvement in funding levels may well have triggered some changes to asset allocation to lock in some of the positive performance. In practice, however, many schemes are still not able to act quickly enough.”
Mr Tayyebi continued “As a result of the ongoing volatility and the need to improve frequency of monitoring, we are seeing increasing demand for monitoring tools with more than 100 plans now using Mercer’s Funded Status Monitor (FSM), as well as more clients moving to full fiduciary management solutions such as Mercer’s Dynamic De-risking Solution (MDDS) so that they are able to take full advantage of market opportunities as they arise.”
”With an increasing number of defined benefit pension schemes being closed not just to new entrants but also to future accrual, the primary focus for scheme sponsors and trustees is the ability to finance and pay future benefits. The ability of trustees to do this depends both on the contribution income from the scheme sponsor and the investment income from the scheme assets. Despite significant contributions and financial support from many scheme sponsors funding levels remain stubbornly low driven primarily by low gilt yields, “ said Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group. “However by actively considering a wider range of asset classes, relying less on low yielding gilts and taking advantage of temporary changes in market conditions, as were observed this month, trustees and scheme sponsors are able to materially improve funding levels.”
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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