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UK company pension deficits increase by more than 40 per cent over a two month period

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Mercer’s latest Pensions Risk Survey data shows that the accounting deficit of defined benefit (DB) pension schemes for the UK’s 350 largest listed companies increased from GBP119 billion on 30 June 2016 to GBP139 billion at the end of July.

At 29 July 2016, asset values were GBP717 billion (representing a rise of GBP23 billion compared to the corresponding figure of GBP694 billion at 30 June 2016), and liability values were GBP856 billion, representing an increase of GBP43 billion compared to the corresponding figure of GBP813 billion at the end of June. Pension liabilities reached a record high at the end of July, the highest level since Mercer has monitored deficits on a monthly basis.

“The continued fall in high quality corporate bond yields meant that liability values increased by over 5 per cent during just one month,” says Ali Tayyebi, Senior Partner in Mercer’s Retirement business. “The combined fall in corporate bond yields since the end of May has meant that deficits have increased by 40 per cent over the two month period up to the end of July, despite an 8 per cent increase in asset values over that period. Deficits have more than doubled since the start of the year.

“The fall in corporate bond yields over the last two months has now broadly matched the fall in gilt yields.This means that both the measure of deficit used for reporting in company accounts, as well as the deficit figure used by pension scheme trustees as a basis for determining cash contribution requirements are now likely to be considerably higher following the Brexit vote,” adds Tayyebi. 

Le Roy van Zyl (pictured), Senior Consultant in Mercer’s Financial Strategy Group, says: “The vote for Brexit is clearly having a significant impact. Furthermore, the aggregate size of the pension scheme deficits glosses over the fact that some schemes and sponsors will have been much more affected than others, depending on their investment strategy and the nature of the sponsor’s business. In talking to trustees and sponsors over the past month it is clear that the continued uncertainty following the EU referendum makes it a challenging environment to operate a pensions scheme in.

“However, it is recognised that working through scenarios of what might happen is a very useful way of identifying key threats and opportunities. This will enable a revised set of priorities to be adopted, or at least ensure in other cases that “no action” is a deliberate decision. Indeed, some risk management opportunities are now much more attractive than before.”

Van Zyl adds: “What has become very clear is that because different schemes have different stress points, careful assessment and planning is needed to ensure the right approach is adopted from here on.”

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 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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