Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes in the UK increased marginally over the month of August. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[2] for the DB schemes of the FTSE350 companies stood at £63bn (equivalent to a funding ratio of 89%) at 31 August 2012. This compares to a deficit figure of £61bn at the end of July (funding ratio of 89%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%), on a like-for-like basis.
Over the month, the yield on high quality corporate bonds remained virtually unchanged but the market’s expectation for long-term inflation (measured using the difference between fixed and index linked gilt yields) increased marginally. The net effect was an increase in liabilities of around 1% over the month to £576bn as at 31 August 2012. Asset values also increased marginally from £510bn as at 31 July 2012 to £513bn as at 31 August 2012 to offset the increase in liabilities to some extent.
“It is clear from our analysis of company year-end accounts that corporate sponsors of UK pension schemes continue to review the information used to derive the assumptions adopted to value pension scheme liabilities for accounting purposes. The results can have a material impact on the disclosed balance sheet position and the reported earnings, so is important that companies and their investors understand the range of alternatives.” said Ali Tayyebi, Mercer’s Head of DB Risk in the UK.
Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group, commented: “Despite the slight increase in the market implied outlook for inflation, generally speaking, we continue to view the pricing of inflation hedging as relatively attractive compared to the recent past. Market opportunities, such as this one, arise from time to time and trustees need the governance structure in place to take advantage of them.”
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. 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.
|
