FTSE350 pension deficits fall by only £1bn despite gain

Originally published on 06 November 2017

Mercer’s Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies decreased slightly from £68bn at the end of September to £67bn on 31 October 2017. At 31 October 2017, liability values increased by £7bn to £832bn compared to £825bn at the end of September driven by a modest increase in market expectations of inflation. Asset values were £765bn (an increase of £8bn compared to the corresponding figure of £757bn at the end of September 2017).

Ali Tayyebi, a Senior Partner at Mercer, said: “Deficits remained largely unchanged over the month despite a £8bn increase in asset values. This was mainly due to an increase in long-term market expectations around inflation which contributed to liabilities increasing by a broadly similar amount. The market’s view on inflation has increased gradually over the last two months, but it still remains slightly lower than the level reached at the end of January this year. The Bank of England announcement on increasing rates has been expected for some time, but it remains to be seen how inflation develops over the coming months and what impact this will have on pension schemes.”

Le Roy van Zyl, a strategic advisor and Partner at Mercer, added: “Despite a number of world developments that could point to good or bad news, market conditions have continued in a relative state of calm this month. However, pension scheme sponsors and trustees must consider the impact of either scenario. For example, with significantly improved conditions over the past 12 months, locking in some of this good news may help weather any future storms. Indeed, in some cases, when considering the amount of risk being taken and contributions coming in from the sponsor, schemes are on track to overshoot their targets. This may well be the right approach, but only if it is a result of a deliberate decision by the trustee and the company. It is a good time to review plans.”

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.