Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes in the UK has remained broadly unchanged in the first month of this year. According to Mercer’s latest data, the aggregate FTSE350 IAS19 defined benefit pension deficit[1] stood at £83bn (equivalent to a funding ratio of 85%) at 31 January 2012, compared to £84bn at 31 December 2011 and £64bn at 31 December 2010. Although asset values increased from £478bn as at 31 December 2011 to £487bn as at 31 January 2012 there was a broadly matching increase in liability values (from £562bn as at 31 December 2011 to £570bn as at 31 January 2012) due to a small reduction in corporate bond yields, which are used to discount liabilities.
“Corporate focus was inevitably on the year end position as at 31 December 2011. Nevertheless it is disappointing to see no improvement in funding levels over the first month of 2012, with deficits remaining stubbornly high following the deterioration during 2011. The changes in January highlight a number of factors at play driving the overall funding level. Although the FTSE100 increased by around 2% over the month, pressure remained on the liability side with AA corporate bond yields reducing even further over the month.” said Ali Tayyebi, Senior Partner and Pension Risk Group Leader.
Mercer’s data relates only to about 50% of pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. Other measures are also relevant for trustees and employers considering their risk exposure. Based on data published on 31 January 2012 in the Pension Regulator’s Purple Book, at 31 March 2011 UK pension schemes as a whole had a shortfall in their assets of £471bn[2] relative to the amount it is estimated would be required to buy out their liabilities in the insurance market.
“The scale of the problem faced by UK companies is supported by data published by the Pensions Regulator, and confirms that this issue is unlikely to be resolved in the short term,” continued Mr. Tayyebi
Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group added, “During 2011 FTSE350 companies made an estimated £25bn of contributions but still watched their deficits grow from £64bn to £84bn. With Gilt yields remaining close to their record low point and significant market uncertainty caused by, amongst other things, the Euro zone currency issues, clients need to position themselves carefully for 2012. With an increasing number of companies taking action, shareholders of companies with legacy defined benefit plans will expect management to have a well defined strategy in place.”
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