Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for the UK’s largest 350 companies increased during January 2014. According to Mercer’s latest data, the estimated aggregate IAS19 deficit for the DB schemes of FTSE350 companies stood at £104bn (equivalent to a funding ratio of 84%) at 31 January 2014, compared to £96bn (equivalent to a funding ratio of 85%) at 31 December 2013.
As at 31 January 2014, asset values stood at £562bn (representing a reduction of £2bn compared to the corresponding figure of £564bn as at 31 December 2013), and liability values stood at £666bn (representing an increase of £6bn compared to the corresponding figure of £660bn as at 31 December 2013).
“In the last 10 days of the month the UK equity market fell by close to 5% from its January high-point. It is therefore not surprising that deficits have increased to their highest month-end level since April of last year. However, we expect that there will have been a significant dispersion of experience at an individual pension scheme level, and schemes with higher levels of interest rate hedging are likely to have fared better,” said Ali Tayyebi, Head of DB Risk at Mercer UK. “Equity markets appear to remain acutely sensitive to even relatively small changes in market sentiments. This highlights the importance of speed of execution where sponsors and trustees may be adopting a “dynamic” market-related approach to de-risking.”
“The fall in funding levels on the IAS19 measure is likely to be replicated on the funding measure that trustees use to assess the level of cash contributions they seek from sponsors. If this position continues through to the end of March and start of April, when the cash requirements for many schemes are reassessed, it could result in higher than expected cash contributions for companies and could also be a test of the Pension Regulator’s proposed new objective to minimise any adverse impact on the sustainable growth of the employer, which is currently the subject of industry consultation,” said Adrian Hartshorn, Senior Partner in Mercer’s Financial Strategy Group.
Mercer’s data relates only to about 50% of all UK DB 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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