Mercer’s Pensions Risk Survey data showed that UK market volatility pushed the liabilities of FTSE350 defined benefit pension schemes to £702 billion during October. Deficits also rose to a 2014 high point of £113 billion but ended the month at £87 billion just below the September month end figure of £89 billion.
“It has been one of the more volatile months for pension scheme funding levels. Deficits increased by £24bn in the first half of the month only to fall back by virtually the same amount over the second half,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “This is a stark reminder that volatility has not gone away and that companies and trustees should have an active plan to manage the associated risks in a measured way against their clear long term objectives.”
According to Mercer’s data, long-dated bond yields hit new lows in the first half of the month causing FTSE350 pension scheme liability values to rise beyond £700bn for the first time ever. Overall asset values remained surprisingly stable throughout the month. For example, a dip of nearly 7% in the UK equity markets in the first two weeks of the month was balanced as falling bond yields buoyed the value of bond assets. The reduction in AA bond yields observed in the first part of October was driven at least partly by lower Government bond yields. This resulted from lower levels of liquidity in the middle of the month.
Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group, added: “Many companies have 31 December year ends and will now be monitoring market yields closely. This volatility might only be short lived, but could have a more material impact on company balance sheets if conditions similar to mid-October occur at year-end.”
According to Mercer’s latest data, the estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £87bn (equivalent to a funding ratio of 87%) at 31 October 2014. This compares with £89bn (equivalent to a funding ratio of 87%) at 30 September 2014. At 31 October 2014, asset values were £596bn (representing an increase of £6bn compared to the corresponding figure of £590bn as at 30 September 2014), and liability values were £683bn (representing an increase of £4bn compared to the corresponding figure of £679bn at 30 September 2014). At 31 December 2013, pension scheme deficits stood at £56bn corresponding to a funding ratio of 91%.
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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