Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes in the UK increased marginally over the month of June. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of the FTSE350 companies stood at £73bn (equivalent to a funding ratio of 87%) at 30 June 2012. This compares to a deficit figure of £72bn at the end of May (funding ratio of 87%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%)[2].
Over the month, high quality corporate bond yields increased marginally. A rise in corporate bond yields, which are used to value pension scheme liabilities in company accounts, will reduce the value placed on pension scheme liabilities. However, this was more than offset by an increase in the market’s view of long-term price inflation, which increases the value placed on scheme liabilities. This meant the overall liability value increased marginally over the month from £568bn to £574bn as at 30 June 2012. Asset values also increased marginally over the month from £496bn to £501bn as at 30 June 2012.
“The overall deficit has remained at close to £70bn at each of the four month ends since 31 March 2012, having increased from £61bn at the end of 2011. However, behind this apparent stability there has been significant volatility between the month end points. For example, deficits reached £94bn during May before being “rescued” by a fall in expected long-term inflation. During June deficits moved between a low point of £67bn and a high point of £82bn over an 11 day period representing a near 3% swing in funding levels. Although these are numbers used for Company accounting purposes, the broad picture would be similar on assumptions which pension scheme sponsors and trustees use for funding purposes. In turn this highlights the importance of being able to act quickly if pension scheme de-risking strategies are based on funding level changes”, said Ali Tayyebi, Senior Partner and Pension Risk Group Leader.
Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group commented, “With such significant short term movements in the funding level trustees need to be in a position to react quickly. For example over the last 2 years we have observed that a 5% improvement in funding level could have been achieved by using a dynamic asset allocation strategy compared to a static asset allocation.”
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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