Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for UK companies reduced over the month of May. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of the FTSE350 companies stood at £98bn (equivalent to a funding ratio of 85%) at 31 May 2013. This compares to a deficit figure of £108bn at the end of April 2013 (funding ratio of 84%).
Asset values remained unchanged over the month, ending at £557bn as at 31 May 2013. Liability values reduced by £10bn over the month, from £665bn as at 30 April 2013 to £655bn as at 31 May 2013.
“The fall-back in equity values towards the end of the month meant that, overall, it was a flat month for asset values despite the equity market getting close to its historic high value during the month. Corporate bond yields increased markedly over the month which had the effect of reducing liability values calculated for company accounting purposes, although the majority of this effect was offset by an increase in the market’s expectation for long-term inflation. The combined effect of all these factors was to bring the deficit back down to just below £100bn. Taking a slightly longer term view, pension scheme assets have increased by around 15% since 31 December 2011. The problem is that liability values have increased by 20% since then.” said Ali Tayyebi, head of DB Risk in the UK. “This highlights the challenges pension scheme sponsors and trustees have experienced in controlling pension scheme deficits over this period and therefore the need which many have felt to embrace more sophisticated or innovative approaches to doing so”, added Mr Tayyebi.
“Despite the strong rally in equity prices since the start of the year, pension scheme deficits have increased by around £25bn. This emphasises the need for pension scheme trustees and sponsors to develop integrated solutions to manage pension scheme debt that take account not only the scheme assets, but also the scheme liabilities and other potential avenues of financial support. For example, there have been several recent cases of sponsors using balance sheet assets to support a funding solution. By providing additional security towards the trustees’ funding objective, these non cash assets might also enable the trustees to adapt their investment strategy to help manage their, and the company’s, overall risk exposure", said Adrian Hartshorn, Senior Partner in Mercer's Financial Strategy Group. "A well thought through financial management plan developed through joint working will capture the key risks resulting from the pension scheme and provide a strategic roadmap for addressing these risks taking account of market opportunities and available resources", added Mr Hartshorn.
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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