Mercer’s Pensions Risk Survey data shows that the accounting deficits of defined benefit (DB) pension schemes for the UK’s largest 350 companies fell marginally during June, reversing the trend of increasing deficits over the previous three months. According to Mercer’s latest data, the estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £112bn (equivalent to a funding ratio of 84%) at 30 June 2014 compared to £113bn (again equivalent to a funding ratio of 84%) at 31 May 2014.
At 30 June 2014, asset values were £581bn (representing a reduction of £2bn compared to the corresponding figure of £583bn as at 31 May 2014), and liability values were £693bn (representing a reduction of £3bn compared to the corresponding figure of £696bn at 31 May 2014). As at 31 December 2013, pension scheme deficits stood at £96bn corresponding to a funding ratio of 85%.
“Experience over the month of June has highlighted just how sensitive pension deficits remain to relatively small movements in key financial variables, with deficits varying from a low point of £105bn to a high point of £116bn during the month,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “Comments from the Governor of the Bank of England earlier this month, indicating that interest rates could go up sooner than expected, seem to have had very little impact on the average long-term yields which determine pension scheme deficit calculations. However, both gilt yields and corporate bond yields did increase over the first half of the month before falling again towards the month end. Even this limited fluctuation of less than 10 bps was largely responsible for a swing of more that £10bn in the deficit during the month."
“In funding level terms this corresponds to around 2%. Although this may not appear large it is actually quite significant in terms of the dynamic de-risking funding level triggers now operated by many pension schemes. Taking advantage of these incremental opportunities is key to a cost-efficient way of addressing their funding and risk management objectives,” added Mr Tayyebi.
“Schemes really do need to make the most of opportunities as and when they arise”, added Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group. “We have seen a lot of market movement since this time last year, so although companies reporting their results for the half year are likely to have seen an increase in deficits, those who have been able to capitalise positively on market volatility may have mitigated that impact substantially.”
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.
|
