The accounting deficit of defined benefit pension schemes for the UK’s largest 350 companies remained substantially unchanged during August according to Mercer's latets Pensions Risk Survey. According to Mercer’s latest data, the estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £89bn (equivalent to a funding ratio of 87%) at 30 September 2014 compared to £90bn (equivalent to a funding ratio of 87%) at 31 August 2014.
At 30 September 2014, asset values were £590bn (representing a reduction of £5bn compared to the corresponding figure of £595bn as at 31 August 2014), and liability values were £679bn (representing a reduction of £6bn compared to the corresponding figure of £685bn at 31 August 2014). At 31 December 2013, pension scheme deficits stood at £56bn corresponding to a funding ratio of 91%.
“Although long-dated gilt yields and high quality corporate bond yields have increased during the month this is only a small reversal of the sharp falls in yields during late July and August. Nevertheless this had a positive impact on deficits over the month,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “Also, despite a fall of around 3% in UK equity values the diversification of the asset portfolios held by pension schemes meant that total pension scheme assets fell by less than 1%.”
Alan Baker, UK Head of DB risk at Mercer, added: “The level of sustained deficits continues to be a concern for many pension scheme sponsors. As a result many are reviewing and implementing strategic reviews on the financing of pension benefits. This includes sponsors looking to use the new pension flexibility options to manage both cost and risk. In some cases these reviews result in liability hedging using traditional asset based strategies or more recently developed hedging options, such as longevity hedging which Mercer has recently made accessible to smaller and mid-sized schemes.
“This focus on insured solutions to significantly reduce or eliminate pension obligations has been exemplified by the two recent US transactions where Motorola transferred $3bn of liability to an insurer and Bristol-Myers Squibb who were involved in a $1.4bn deal. Overall 2014 has already seen more transactions than 2013 and we expect the use of these risk management solutions to continue to grow.”
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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