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Pensions

Asset prices shrink pensions gap

Asset prices shrink pensions gap

Mona Dohle
Tuesday 5th June 2018

The pension gap for FTSE350 companies has dropped my more than 30% throughout May, largely driven by a spike in asset price valuations.

The gap between assets and liabilities fell by £16bn to £34bn over the last month, compared to £72bn at the beginning of the year, the latest survey conducted by Mercer revealed.

Compared to September 2016, the pension gap dropped by £122bn, largely due to a rise in asset prices, while liabilities have declined only marginally. Over the past month, despite market volatility, asset values have increased by £15bn as the FTSE100 reached a new record high by mid-March.

Alan Baker, partner and chair of Mercer’s DB Policy Group cautiouns against reading these results with too much optimism: : “This is great news for both pension schemes and company sponsors with yet another reduction in the pension gap, but we must not be complacent. Market swings could dramatically reverse these improvements and have done so in the past. Therefore, it’s important that Trustees and sponsors understand the risks they’re exposed to and have the right strategies in place to lock in these gains. As highlighted by the Pensions Regulator through integrated risk management (IRM), it’s crucial to have contingency arrangements and plans in place.”

Le Roy van Zyl, partner and strategy advisor at Mercer, adds: “While this is more welcome news, recent market volatility sparked by the political situation in Italy serves as a timely reminder of the speed at which things can change. We increasingly see schemes having an action focused risk and cost management plan. Such a plan will be clear on the conditions under which specific activities will be warranted, e.g. member options, insurance market solutions, and cashflow matching asset strategies. Increased market uncertainty, as we are seeing at the moment, then feeds into this plan and consequently the sequence of activities.”

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