Mercer’s Pensions Risk Survey data shows that the accounting deficit of DB pension schemes for the UK’s largest 350 companies increased during August. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the DB schemes of FTSE350 companies stood at £90bn (equivalent to a funding ratio of 87%) at 31 August 2014 compared to £73bn (equivalent to a funding ratio of 89%) at 31 July 2014.
At 31 August 2014, asset values were £595bn (representing an increase of £15bn compared to the corresponding figure of £580bn as at 31 July 2014), and liability values were £685bn (representing an increase of £32bn compared to the corresponding figure of £653bn at 31 July 2014). At 31 December 2013, pension scheme deficits stood at £56bn corresponding to a funding ratio of 91%.
“Long-dated gilt yields and high quality corporate bond yields both fell sharply by around 30 basis points during August, leading to a 5% jump in liability values,” said Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “In the absence of any recovery in yields or asset out-performance, companies with 31 December year-ends may typically be reporting higher deficits at the end of this year compared to the end of last year.
“The last time gilt yields were this low, back in May 2013, the yield spread between gilts and high quality corporate bonds was notably higher and arguably there was less confidence in the economic and financial environment. Clearly there are different forces driving the bond markets this time round and this gives rise to new challenges for those with their focus on managing the risk and financing associated with pension schemes,” added Mr Tayyebi.
Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group, added: “Short-term market movements provide a snap shot of the financial position of pension plans. Corporate sponsors of UK pension plans should look through these short-term market movements and establish a long term framework for making rational funding, investment and risk management decisions.”
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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