Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the FTSE350 companies increased over January 2015. Pension deficits increased from £107bn as at 31 December 2014 to £133bn as at 31 January 2015. The funding level reduced from 85% to 83%, with the deterioration being substantially driven by an increase in liability values resulting from a particularly sharp fall in corporate bond yields over the month.
At 31 January 2015, asset values were £627bn (representing an increase of £19bn compared to the corresponding figure of £608bn as at 31 December 2014), and liability values were £760bn (representing an increase of £45bn compared to the corresponding figure of £715bn at 31 December 2014).
“A combination of unexpectedly low levels of inflation and concerns about the prospects for economic growth in Europe appear to have contributed to one of the largest ever one month falls in high rated corporate bond yields and a record high for UK pension deficits,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “If these low yields continue, it will be particularly unexpected and unwelcome news for companies who have their year-end reporting dates at 31 March. The picture will be similar for many funding valuations, which drive discussions on contribution requirements between pension scheme trustees and employers.
Increased funding deficits being reported will likely lead to challenging contribution negotiations.”
Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group said,
“The expectation and subsequent announcement by the European Central Bank that it will launch a €60bn-a-month bond-buying programme as it seeks to revitalise the Eurozone economy and counter deflation had a significant impact on both government and corporate bond yields. The €60bn-a-month bond-buying programme was far larger than investors had expected and caused yields to fall as expected demand for bonds increased. Some pension schemes have already significantly hedged interest rates. As a result the negative impact on deficits will be much smaller compared to those schemes which have little or no interest rate hedging in place. The key issue for clients considering hedging programmes is when to start and at what level of interest rates to hedge.”
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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