• Pension scheme accounting deficits for FTSE350 companies were £82bn at 30 June 2013, corresponding to a funding ratio of assets over liabilities of 87%.
• Fall in bond values reduce pension scheme liabilities and more than offset the fall in pension scheme asset values
• Over the month pension deficits reduced by £16bn. As at 31 December 2012 pension deficits stood at £72bn (corresponding to funding level of 88%).
Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes for the UK companies reduced over the month of June. According to Mercer’s latest data, the estimated aggregate IAS19 deficit[1] for the defined benefit schemes of the FTSE350 companies stood at £82bn (equivalent to a funding ratio of 87%) at 30 June 2013. This compares to a deficit figure of £98bn at the end of May 2013 (funding ratio of 85%).
Asset values fell by £15bn over the month from £557bn at 31 May 2013 to £542bn at 30 June 2013. However, liability values reduced by £31bn over the month - from £655bn at 31 May 2013 to £624bn at 30 June 2013.
“It will come as a welcome and perhaps a surprising relief to many that despite the largest monthly fall in asset values since January 2009, pension scheme deficits also experienced their largest monthly fall over the last 10 months as a result of a reduction in liability values. Recent statements from the Chairman of the US Federal Reserve, Ben Bernanke, that Quantitative Easing may have to come to an end at some point, triggered falls in asset values across the globe. The fall in equity markets around the world was the most visible aspect of this. However, an equally material aspect for pension schemes was the fall in both government and high quality corporate bond prices, with a corresponding increase in yields on those assets. The rise in these bond yields reduced liability values calculated for company accounting purposes.” said Ali Tayyebi, head of DB Risk in the UK. “Although the experience on bond yields over this month has been positive, it does highlight that the sensitivity to long-term interest rates is typically the most significant risk to pension scheme deficits.”, added Mr Tayyebi.
“Over the last month Government bond yields and high quality corporate bond yields have increased offering some potential buying opportunities for pension schemes. However, some parts of the yield curve offer better value so that it is important to consider how to implement these opportunities. Additionally, for schemes who already have substantial holdings in bonds, the balance between inflation linked bonds and nominal bonds should be reviewed as interest rate and inflation expectations change", said Adrian Hartshorn, Senior Partner in Mercer's Financial Strategy Group. "It will be interesting to see how markets continue to evolve over the next few months, particularly with Mark Carney taking up his new post as Governor of the Bank of England. Trustees and sponsors will need to monitor this carefully, and should be prepared to act quickly if necessary", added Mr Hartshorn.
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.
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