Pension deficit improved by a total of £40bn from £72bn at the start of the year to £32bn
July saw both asset values and liabilities rise and the deficit increased by £3bn compared to the end of June
2018 expected to be a record year for pension risk transfer due to improving funding levels, attractive pricing in the market and uncertainty over Brexit driving risk reduction
At 31 July, the quoted deficit increased to £32bn (compared to £29bn at the end of June) and funding level remained the same at 96%. Liability values have increased from £818bn to £826bn due to an increase in market implied inflation. Asset values increased from £789bn to £794bn, offsetting the increase in liabilities.
Ali Tayyebi, a Senior Partner at Mercer, said: “The big reduction in accounting deficits so far this year is welcome news. However, pension scheme trustees typically use gilt yields as a basis for measuring the funding position and setting contribution rates. Gilt yields have not risen by as much as corporate bond yields since the start of the year therefore trustees may not have seen the same degree of improvement on funding valuations. Nevertheless, trustees and employers need to continue to ask themselves how much risk they need to take to meet their objectives.”
Le Roy van Zyl, a strategic advisor and Partner at Mercer, added: “Whilst July saw the deficit remain stable, continued uncertainty over the outcome of the Brexit negotiations means there is a clear need for pension scheme trustees and sponsors to be prepared for the fluctuating circumstances. This preparation should focus on scheme finances and risk but also the challenges of making effective decisions against this uncertain backdrop. A range of outcomes are possible and it is important that schemes work through scenarios to establish whether there would be a material impact to their scheme under any of the 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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