The accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies fell from £66bn to £49bn on in February, according to Mercer’s Pensions Risk Survey data.
Asset values were £647bn at the end of the month, an increase of £3bn compared to the start of the month, while liability values were £696bn, representing a reduction of £14bn. Over the same period technical provisions liabilitie,s which drive trustees’ decision making and likely demands for funding from employers, rose by £13bn.
Ali Tayyebi, senior partner in Mercer’s Retirement business, described the figures as surprising.
“With everyone’s primary focus on the stock market and government bond yields it will be a surprise that the accounting deficits have improved quite so much over the month.” He said. “This is because the yield on corporate bonds – relative to gilts – have increased over the month and this has reduced the calculation of the liability measure reported on companies’ balance sheets”.
He continued, “In contrast the calculation of liabilities typically used by pension fund trustees for determining cash contribution requirements is based on gilt yields. As these yields fell during the month, funding deficits for many schemes will have increased at the same time as accounting deficits will have reduced. This will be unwelcome news as some of these schemes approach their regular funding valuation dates at 31 March or 5 April.”
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.
Le Roy van Zyl, Principal in Mercer’s Financial Strategy Group, said, “February was a very volatile month, reflecting an amalgam of economic and political narratives that could have further serious repercussions. Even though the month ended off its lows, there should be no doubt that the potential for significant setbacks to pension schemes in the months and years to come, with consequences for cash funding, is very real. Against this backdrop, both trustees and sponsors are likely to become increasingly focused on how their financial exposure and other costs can be better managed.
“In our experience, there are significant steps that can be taken to improve risk mitigation and therefore control cost over the short and long term. This is reinforced by the Pensions Regulator’s recent Integrated Risk Management guidance which emphasises the need for looking at solutions that incorporate all key areas of potential risk. This means that trustees and sponsors typically have to “up their game” (make sure their plans are documented and take account of funding investment and covenant risks).”