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Bank rate cut sends DB deficit soaring

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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 increased by GBP10 billion in just five days, from GBP139 billion at the end of July to GBP149 billion on 4 August, following the MPC vote to cut the bank rate from 0.5 per cent to 0.25 per cent. 

On 4 August 2016, asset values were GBP721 billion (representing a rise of GBP4 billion compared to the corresponding figure of GBP717 billion at 29 July 2016), and liability values were GBP870 billion, representing an increase of GBP14 billion compared to the corresponding figure of GBP856 billion at the end of July. Both pension liabilities and deficits reached a record high at 4 August 2016, the highest level since Mercer started monitoring deficits on a monthly basis.
 
“This sudden increase reminds us that it is the outlook for future long-term secure investment returns which drives pension scheme deficits – much more than the short term performance of assets,” says Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “Asset values are around 12 per cent higher than they were a year ago but the ratio of assets to liabilities has reduced from 89 per cent to 83 per cent and the deficits have increased from GBP81 billion to GBP149 billion over the same period.”
 
Le Roy van Zyl, Senior Consultant in Mercer’s Financial Strategy Group, says: “The aftermath of the vote for Brexit is still having a significant impact. The Bank of England’s actions should help to support economic activity, but whether the economy is going into recession is still unclear. This will of course have an effect on pension scheme finances and the health of sponsors – in some cases significantly so, depending on schemes’ investment strategy and the nature of the sponsor’s business.
 
“As these uncertainties may well not clear up for some time, and there is likely to be significant volatility still to come, it is not appropriate to follow a wait-and-see approach for the majority of schemes. Opening a dialogue between trustees and sponsors around how to tackle potential developments is a key step that can be taken in the face of these uncertainties.”
 
Mercer’s data relates to about 50 per cent of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The company writes that 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, the firm concludes.

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