The reduction of defined benefit (DB) pension schemes’ deficits for the UK’s 350 largest listed companies was driven by rising corporate bond yields and a slight fall in market implied inflation. At the end of April, liability values had fallen by £12 billion to £826 billion, while asset values were up by £7 billion to £773 billion.
Alan Baker, Head of DB Solutions Development and Partner at Mercer, said: “We have already seen a meaningful reduction in the pensions gap during 2017 and Q1 2018 and April’s sharp reduction continues this trend. However, the static asset valuations that we have seen for several months and greater volatility in liabilities demonstrate the importance of trustees and sponsors understanding the overall level of risk facing their pension scheme. Trustees and sponsors should ensure they have plans in place to protect them from any downside and to ensure their exposure is in line with their risk appetite.”
Adrian Hartshorn, Senior Partner at Mercer, added: “After a decade of falling yields and increasing longevity expectations, market conditions appear to have stabilised and in many cases are moving to improve the finances of pension schemes. However, the same uncertainties remain, and scheme sponsors and trustees should take the opportunity to lock in the improvements in the funding position. There are a number of real actions that trustees and sponsors could implement that take advantage of current market conditions, including a range of member options, insurance market solutions and asset-liability hedging.”
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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