- Pension scheme accounting deficits of £60bn at 31 October show an improvement from £64bn at 30 September
- This represents a 1% improvement in the funding levels over the month from 88% to 89% largely due to the recovery in global stock markets
Mercer’s Pensions Risk Survey data shows that accounting measures of Defined Benefit pension schemes in the UK have recovered over the month of October to broadly the same position they were at as at the end of August. According to Mercer’s latest data, the aggregate FTSE350 IAS19 defined benefit pension deficit[1] stood at £60bn (equivalent to a funding ratio of 89%) at 31 October 2011, compared to £64bn (funding ratio of 88%) at both 30 September 2011. The funding ratio at 31 December 2010 was also 88%.
Corporate bond yields, which are used to discount liabilities, fell again marginally over the month and this would by itself tend to increase the calculation of the liabilities. However, the value of pension scheme liabilities is also linked to market pricing of long term price inflation and this has also continued to fall, largely offsetting the effect of the fall in corporate bond yields, so that the total liabilities remained broadly unchanged over the month, ending at £531bn as at 31 October 2011. On average, about 40% of defined benefit schemes’ funds are invested in return seeking assets with UK equities for example representing about half of this. The FTSE 100 increased by 8.2% over the month increasing total assets. The combination of the relatively flat liability values and rising asset values resulted in the slight reduction in the total deficit over the month.
“Experience over the month again demonstrates the low correlation between the changes in assets and factors which drive the calculation of the liabilities. Over October this has been in favour of pension schemes deficits at least as far the employer’s IAS19 accounting basis is concerned,“ said Ali Tayyebi, Senior Partner and Defined Benefit Risk Group Leader. “The economic situation clearly still remains very uncertain and this was acutely highlighted by the near 3% fall in the UK equity market on the last day of the month. With the FTSE 100 getting closer to the values seen earlier in the year it may make some Trustees and employers think about how they should react to investment gains. For example, depending on circumstances, in some cases they might want to lock in some of these gains and reduce the exposure to any subsequent fall back in equity values.”
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