Deficits increased from £39bn at the end of 2015 to £137bn on 30 December 2016.
Corporate bond yields fell by more than 100 basis points over 2016, increasing liabilities on companies’ balance sheets.
Pension deficit contributions and positive asset returns have been offset by the fall in corporate bond yields and rise in inflation expectations.
At 30 December 2016, asset values were £720bn (representing an increase of £19bn compared to the corresponding figure of £701bn at 30 November 2016), and liability values were £857bn (representing an increase of £29bn compared to the corresponding figure of £828bn at the end of November). Both liabilities and deficits have increased significantly compared to the end of 2015 when assets were £634bn and liabilities were £673bn with a corresponding deficit of £39bn.
“After a very challenging year, pension deficits increased again and end the year more than three times higher than the end of 2015 at £137bn. This continues to put real pressure on any risk management plans and will require Trustees and corporate sponsors to work closely together to establish the right framework to monitor and manage those risks,” said Alan Baker, UK DB Risk Leader for Mercer. “Depending on the nature and sensitivity of the pension scheme's covenant it is crucial that Trustees and sponsors position themselves appropriately to deal with the key scenarios that can emerge."
Le Roy van Zyl, a Mercer Senior Consultant, commented, "Pension scheme trustees and sponsors face the new year with significant uncertainty. Brexit is likely to move beyond a mere intention, and the effect of new leadership in the US will become clear - not to mention other major events such the French presidential elections.”
Mr van Zyl added, "If we look at how volatile conditions have been, and how volatile they may well continue to be, schemes will have to be responsive on a variety of issues. In this environment, best outcomes will be achieved by tackling covenant, funding and risk management together. It will be especially important to focus on future cashflow requirements in different scenarios."
Mercer’s 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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