FTSE350 pension scheme deficits increase by £9 billion as growth in liabilities prunes asset recovery
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Pension scheme accounting deficits were £92bn at 29 February 2012, an increase compared to the £84bn at 31 December 2011 and £83bn at 31 January 2012
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Funding levels fell over February even as the FTSE100 edged closer to the 6000 mark.
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7% increase in FTSE 100 since January 2012 offset by fall in bond yields
Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes in the UK has increased despite rising equity markets. According to Mercer’s latest data, its estimate of the aggregate IAS19 measure of FTSE350 DB pension schemes’ deficits* stood at £92bn (equivalent to a funding ratio of 84%) at 29 February 2012, compared to £84bn at 31 December 2011 and £83bn at 31 January 2012.
Although asset values have increased from £478bn as at 31 December 2011 to £494bn as at 29 February 2012, since the yield on the corporate bond yield index used to calculate the liabilities fell, there was a greater increase in IAS19 liability values (from £562bn as at 31 December 2011 to £586bn as at 29 February 2012).
According to Mercer, the recent recovery in asset values – which includes a 7% rise in the FTSE 100 index since the start of the year - has been offset by the increase in liabilities for many schemes. This will push up their deficits again after a brief respite in January.
“Not only are Government bond yields at historically low levels but the extra yield on corporate bonds is coming down. This could push up the liability calculations,” said Ali Tayyebi, Senior Partner and Pension Risk Group Leader. “However, bond yields at longer durations have not fallen. This means that some companies who have taken this fully into account could have seen a reduction in liabilities over the month. We expect to see developments in the approaches companies adopt for valuing pension scheme liabilities in their accounts when the end of December accounts are published.”
With asset values at relative highs compared to the last six months and corporate bond spreads still higher than they were a year ago, Mercer believes that these is the possibility of further downside risks.
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. Some companies are likely to have revised their approach for the December 2011 year end, and the effects of this will be picked up in our subsequent surveys. 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.
Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group added: “Pension scheme deficits are often one of the top three risks that the company boards need to deal with and can prove a barrier to business growth. Increasingly investors and lenders will expect companies to be taking action to manage and reduce the deficit and the impact that the deficit has on company cash flow. As a result of these and other pressures there are now a range of innovative solutions available to tackle pension scheme deficits.”
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