-
Pension scheme accounting deficits were £72bn at 31 May 2012, corresponding to a funding ratio of assets over liabilities of 87%.
-
Overall this is broadly unchanged over the month, although this masks another turbulent month: in mid-May deficits peaked at around £94bn, corresponding to a funding ratio of 84%.
-
A fall in the market’s outlook for RPI inflation has helped deficits recover from the effects of falls in long-term interest rates and stock markets, following renewed concerns around Greece and Spain at the start of the month..
-
GM’s announcement in the US that it intends to buy-out a big part of its defined benefit pension liabilities re-enforces the growing trend of de-risking pension plans on both sides of the Atlantic
Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes in the UK increased marginally over the month of May. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of the FTSE350 companies stood at £72bn (equivalent to a funding ratio of 87%) at 31 May 2012. This compares to a deficit figure of £69bn at the end of April (funding ratio of 88%) and a figure of £61bn at the end of December 2011 (funding ratio of 89%)[2].
Over the month, high quality corporate bond yields fell sharply mirroring the fall in UK government bond yields. A fall in corporate bond yields, which are used to value pension scheme liabilities in company accounts, tends to push up liability calculations. However the impact of falls in corporate bond yields was almost entirely offset by a fall in the market’s view of long-term RPI inflation. This meant the overall liability calculation increased only marginally over the month to £568bn as at 31 May 2012. Asset values also fell marginally over the month to £496bn as at 31 May 2012.
According to Ali Tayyebi, Senior Partner and Pension Risk Group Leader, “During the first half of the month the aggregate deficit had increased by £25bn to around £94bn – putting it on track to be one of the worst months since August 2010, with deficits back to levels last seen two years ago. This was the direct impact of the renewed concerns around Greece’s economic future which in turn promoted the perceived safe haven status of UK gilts and high quality corporate bonds.”
“However during the second half of the month the market’s view of long-term RPI inflation also fell sharply and this has come as an unexpected benefit for pension schemes. This fall in inflation appears to be co-incident with publication of minutes from the Consumer Prices Advisory Committee, commenting on its review of the RPI / CPI inflation measures, which is looking at the possibility of closing the gap between the two measures.“
Adrian Hartshorn, Partner in Mercer’s Financial Strategy Group commented, “Many pension schemes who have done the ground-work to put inflation hedging triggers in place may find themselves in a position to increase their level of inflation hedging thereby reducing their exposure to future inflation risk at relatively attractive rates compared to the recent past. This highlights that even amidst the market turmoil and uncertainty there are risk management opportunities for those who are well prepared.” Mercer’s data relates only 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.
|
