Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for the UK companies increased over the month of April. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[2] for the defined benefit schemes of the FTSE350 companies stood at £108bn (equivalent to a funding ratio of 84%) at 30 April 2013. This compares to a deficit figure of £89bn at the end of March 2013 (funding ratio of 86%).
Asset values increased from £552bn at 31 March 2013 to £557bn at 30 April 2013. Although the market’s view of long term inflation reduced marginally which by itself reduces the value placed on scheme liabilities, there was a significant fall in high quality corporate bond yields with the net effect that total liabilities increased in value from £641bn at 31 March 2013 to £665bn at 30 April 2013.
“The equity markets recovered well from their dip early in the month and asset values increased by around £5bn over April. It will therefore be a surprise and disappointment to many that both liability values and deficits still managed to reach highs not seen for several years. The key driver was the fall in high quality corporate bond yields, which have closely tracked the sharp falls in real gilt yields in late March / early April, so that the difference between the yield on these corporate bonds and market implied price inflation is now only just over 1% pa. The environment is proving particularly frustrating for many schemes who will have experienced significant improvements in their asset values but who feel that de-risking into gilts does not look particularly attractive at current prices,” said Ali Tayyebi, head of DB Risk in the UK.
“With the continued low yield on UK Government bonds both corporate sponsors of defined benefit schemes and trustees need to consider a wider range of assets to generate return. It is important to consider the income, risk and return characteristics of the alternative range of assets to ensure the portfolio is structured to meet the investment objectives for the scheme. At the same time sponsors and trustees should consider alternative cost effective ways to manage risk. This might include, for example longevity swaps, liability management exercises or the use of contingent asset structures to support scheme funding,” said Adrian Hartshorn, senior partner in Mercer’s Financial Strategy Group.
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.
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